U.S. gross domestic product grew at a 0.7% annual rate in the second quarter, down from a 1.3% rate in the first quarter. Second-quarter growth was the slowest since the first quarter of 1993, when GDP declined 0.1%. It was also below market expectations for a 1.0% rise. Consumer spending rose 2.1%, down from 3% in the first quarter and the smallest increase since the second quarter of 1997. Real final sales, which exclude inventories, rose 0.7% after posting a 4.0% rise in the first quarter. The GDP price deflator rose at a 2.3% annual rate, down from 3.3% in the first quarter and below expectations for a 2.4% rate. Nonresidential fixed investment fell 13.6% in the second quarter following the first-quarter's 0.2% decrease. Equipment and software fall 14.5%, compared to a 4.1% drop in the first quarter. Inventories added 0.03 percentage point to second-quarter GDP after subtracting 2.61 percentage points from the first quarter change. Businesses reduced inventories by $26.9 billion in the second quarter after a $27.1 billion decrease in the first quarter and an increase of $42.8 billion in the fourth quarter of 2000.
ECONOMY TALK: The GDP report confirmed the market's central theme on the economy by showing that consumer spending remains steadfast whilst business spending nosedives. While the report is weaker than expected, it is not sufficiently weaker than forecasts to meaningful alter the current dynamics of the market. But while the economy may have scantily avoided a recession, it remains mired in a growth recession, as it is growing well below its growth potential. The details of the report contained few substantive surprises. Consumer spending, for example, accounted for all growth in the economy in the second quarter. In fact, if not for the 2.1% increase in personal consumption, GDP would have fallen about 0.7%. Importantly, the increase in consumer spending was largely the result of a sharp increase in spending on durable goods, which increased at a 6.0% rate during the quarter. Spending on nondurable foods increased at just a 0.4% rate. Spending on services, however, increased at a 2.2% rate. Consistent with the rise in PCE, residential fixed investment increased at a sharp 7.4% rate versus +8.5% in the first quarter. The continued buoyancy of consumer spending on big-ticket items suggests that both personal income growth and consumer confidence are strong enough to facilitate continued growth in consumer spending. Consumer spending is likely to get stronger in the period immediately ahead owing to tax rebates, the lagged effects of the Fed's rate cuts, falling energy costs, heavy mortgage refinancing, and high housing turnover. In contrast to the consumer, business spending remained exceptionally weak in the second quarter. Non-residential fixed investment, the key gauge of consumer spending, fell at a 13.6% rate during the quarter--the biggest drop since the second quarter of 1982. The drop was led by continued weakness in investment in equipment and software, which fell 14.5% following a 4.1% drop in the first quarter and a 1.1% drop in Q4 '00. More to come.
ECONOMY TALK: New home sales rose to an annual rate of 922,000 in June, up 1.7% from May's 907,000 rate (revised down from 928,000 initially). That was generally in line with market expectations for a 925,000 reading.
The University of Michigan's final consumer confidence reading for July was 92.4, below expectations for no change from the preliminary 93.7 reading. That also represents a decline from the June index of 92.6. The month-to-month decline was the first since April and came in the current conditions component, which fell to 98.6 from 101.6 in June. The expectations component rose to 88.4 from 86.9. Expectations are likely being boosted by anticipation about the tax rebate, while layoff announcements have weighed on current sentiment, which generally corresponds better to actual consumer spending than the expectations component |
