U.S. economy grows above expectations in Q2, driven by strong domestic demand

The U.S. economic growth eased in the second quarter on the surface, coming in at an annualized rate of 2.1 percent. This is slightly better than market expectations of a growth of 1.8 percent. Final domestic demand came in much stronger than the headline figure implies, rising 3.5 percent, after a weak 1.8 percent in the first quarter. As was anticipated, a drawdown in inventories negatively contributed almost a full percentage point to the headline growth, reversing the boost to the first quarter.

Consumers were the main driver of the strength seen in domestic demand Spending rebounded by rising 4.3 percent, following the weak pace of 1.1 percent recorded in the first quarter. Consumer spending was solid throughout categories, driven by a 13 percent rise in durable goods, but nondurables and services were also healthy.

Government spending also accelerated in the second quarter, growing 5 percent as normal federal government activity resumed after the shutdown in the first quarter. Spending growth at the state and local level continued to be sturdy.

The weakness in the report was seen in the investment side of the economy. Non-residential investment dropped a bit by 0.6 percent. Investment in structures dropped further than expected, falling 10.6 percent. Spending on equipment rose just a bit by 0.7 percent after remaining almost flat in the first quarter. The bright spot in investment continues to be intellectual property products that rose 4.7 percent, a healthy follow through after a 10.8 percent rise in the first quarter.

As was anticipated, residential investment continued to be soft in the second quarter, falling 1.5 percent for the sixth straight quarter. Exports dropped further than anticipated by 5.2 percent. Imports also came in softer than expected, rising just 0.1 percent. Meanwhile, price pressures moderated in the second quarter, with the core PCE deflator rising just 1.5 percent year-on-year.

“Overall, today's report paints a picture of a U.S. economy that may be on two tracks. The consumer remains strong. Government is also spending, and the budget deal struck this week in Congress helps reassure that spending will not drop off a cliff heading into 2020. But the investment side of the economy is lacklustre”, stated TD Economics in a research report.

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