Smaller Decline in US Q2 GDP upon Revision

The initially reported 0.9% q/q saar decline in U.S. real GDP for Q2 was revised to a slightly stronger 0.6% q/q fall. The Action Economics Forecast Survey had looked for a smaller upward revision to a 0.8% quarterly decrease. Real personal consumption expenditure growth was revised up to 1.5% q/q from 1.0%, boosting its contribution to overall GDP to 1.0%-point from 0.7%-point in the advance report. The slowdown in inventory investment, the major subtractor in Q2 was revised slightly smaller, thereby reducing its subtraction to 1.8%-points from 2.0%-points initially reported. The 1.4%-point contribution from a narrowing of the trade deficit was not revised in the second estimate.

The initially reported 3.9% q/q decline in fixed investment was revised weaker to -4.5%, reflecting a larger-than-initially-estimated decline in residential investment (-16.2% vs. -14.0%). With housing being one of the most interest-sensitive sectors in the economy, the sharp rise in interest rates prompted by Fed tightening since March is clearly taking its toll. The decline in housing activity subtracted 0.8%-point from Q2 GDP vs. 0.7%-point initially reported. The 1.9% decline in government spending initially reported was revised slightly to a 1.8% quarterly drop.

The second estimate of quarterly GDP contains the first estimate of quarterly corporate profits. They were meaningfully stronger than expected, rising 6.1% q/q (not annualized) in Q2 and more than offsetting their 2.2% quarterly decline in Q1. Domestic profits increased a robust 6.4% q/q in Q2 vs. a 2.3% decline in Q1 while foreign profits rose 4.9% in Q2 following a 1.5% drop on Q1. Compared with a year ago, total corporate profits are up 8.1%.

The second estimate of GDP also contains the first estimate of gross national income. GDP can be calculated in two fundamental ways—from expenditures across the economy (adjusted for changes in inventories) and also from income generated from production across the economy. The two measures are usually relatively close. However, in Q1 and Q2 this year, the two measures have deviated substantially. The expenditure measure, which is the one reported in the headline, has shown that real GDP fell in both the first and second quarter of this year. By contrast, the income measure has shown that GDP rose 1.8% q/q saar in Q1 and 1.4% in Q2. That is, the expenditure measure has shown a contracting economy while the income measure has shown one growing just a little below trend. More information on this divergence and its possible resolution will be contained in the annual benchmark revisions that will accompany the third estimate of Q2 GDP to be released on September 29.

Inflation as measured by the GDP price index was revised higher in the second estimate—to 8.9% q/q saar from 8.7% in the advance report. This is the fastest price of GDP price inflation since 1981 Q1. The Action Economics Forecast Survey had expected no revision. The revision was away from food and energy prices, which have been major factors behind recent increase. The GDP price index excluding food and energy prices was revised up to 7.2% q/q saar from the initially reported 7.0%. The 7.1% quarterly rise in the PCE price index was not revised. By contrast, the rate of residential investment inflation was revised up to 15.3% in the second estimate from 13.7% initially. This was the sixth consecutive quarter of double-digit readings for this measure. Prices paid by government increased 12.4% in Q2, the highest rate since 1980 Q2, up from the initially reported 11.6%.