EmailThe first look at second quarter GDP was a disappointment as growth remained below potential (2.7% - 3.0%) for the fourth consecutive quarter. GDP increased a modest 1.3% after increasing a downwardly revised 0.4% (from 1.9%) in the first quarter. The Briefing.com consensus expected GDP to increase 1.7%. It is difficult to label the second quarter GDP growth as a negative surprise.
This GDP report contained revisions going back to 2003, and economists did not have access to those revisions when making their predictions. Thus, with GDP growth up 0.9 percentage points from the previous quarter, it can be looked at as if the second quarter was actually stronger than the consensus expected. This, however, is just a technicality as most market participants are going to react to the confirmation that the first half of 2011 was the weakest two-quarter period since the recession ended in 2009.
The lack of growth was primarily due to a sudden halt in real consumer spending. After growing by more than 2.0% each quarter for the past five quarters, real consumption increased only 0.1% in the second quarter. Most economists expected consumption growth between 0.8% and 1.0%. The drop-off in consumption growth was mostly a statistical problem caused by elevated inflation levels. Nominal consumption increased 3.2%. While still low by historical standards, that growth rate is in-line with consumption growth since the end of the recession.
Nonresidential investment increased 6.3% as nonresidential structures investment increased 8.1% and equipment and software purchases were up 5.7%. Surprisingly, residential investment increased 3.8%. Real final sales -- which exclude inventory changes -- increased 1.1% in the second quarter after no growth in the first quarter. The net export deficit shrank from $424.4 billion in the first quarter to $405.7 billion in the second. The decline in the deficit contributed 0.58 percentage points to second quarter GDP growth. Finally, the government sector declined 1.1%, the third consecutive decline. With Congress pressuring to cut more spending and state and local government not able to pick up the slack, we expect government spending to continue to decline over the next several quarters.
