U.S. Q2 real GDP growth revised up, Hurricane Harvey likely to slow growth in Q3

Real GDP of the U.S. rose at an annualized rate of 3 percent in the second quarter, according to the second BEA estimate. This was above the consensus expectation of a rise of 2.7 percent. Most of the upward revision was due to stronger consumption spending, which expanded 3.3 percent from the initial estimate of 2.8 percent. Growth was driven by durable spending that rose 8.9 percent; however, the remaining spending categories also performed better than reported earlier.

Rest of the upward revision was connected to non-residential fixed investment that rose 6.9 percent from the initial estimate of 5.2 percent. The upward revision was mainly seen in intellectual property that rose 4.9 percent from the initial estimate of 1.4 percent and structures that rose 6.2 percent from 4.9 percent, while equipment spending was upwardly revised a bit to 8.8 percent.

Meanwhile, residential investment subtracted less that thought previously, shrinking 6.5 percent as did net exports that totalled -USD 613.4 billion. Inventory investment was slightly higher at USD 1.8 billion. The only major component to be downwardly revised was government that dropped 0.3 percent as federal spending gave less lift while state and local spending was more of a drag, noted TD Economics in a research report.

The GDP and PCE price deflators were slightly changed, rising 1 percent and 0.9 percent annualized in the second quarter. Corporate profits rose 1.3 percent in the second quarter following a drop of 2.1 percent in the first quarter.

The second estimate of the second quarter growth report implies that the U.S. economy is on a stronger footing than was expected earlier with revised up more than expected. All segments of the economy, aside from government, is in better shape that reported earlier. The revised consumer spending data was the highlight of this report, indicating that the consumer, aided along by solid job and income growth has definitely woken up after the first quarter lull, stated TD Economics.

The strength of consumer and business spending is expected to continue into the third quarter. But the current devastation in Southeast Texas is expected to impact the third quarter economic growth, with economic activity significantly disrupted in the Houston, Victoria, and Corpus Christi metro areas.

Therefore, both consumer spending and business investment are expected to sustain subdued performance. But net exports are expected to weigh more the growth, with refined product exports hard hit given the outages of Gulf Coast refineries and ports shuttered.

“We expect Harvey to slow GDP growth by anywhere between 0.1 and 0.4 percentage points, with Q3 growth likely to come in in the 2.5 percent to 3.0 percent range given current tracking”, added TD Economics.

Today’s report should help strengthen the notion that the U.S. economy continued to stay resilient through mid-year and is well positioned to expand in the second half of 2017 and embolden Fed hawks to imply additional rate rises. Still, the subdued inflation figures continue to be a constraint at this point.

“We don't expect these to show much progress until later in the year and consequently feel that Fed is unlikely to act until at least December”, noted TD Economics.

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