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Wells Fargo Securities Economics Group: Economic Growth Was About As Sluggish As Expected in Q2

Source: Wells Fargo Securities Economics Group

Slower Q2 Growth, but no Real Surprises
The news that real GDP grew at just a 1.5 percent annual rate during the second quarter is truly anticlimactic. Virtually every economic report and many of the earnings reports from major U.S. multinationals had already revealed ample evidence that economic growth had slowed in the United States and around the world. This morning's GDP number just made it official.

With the release of this morning's numbers, the GDP data were also revised back to the first quarter of 2009. The revisions were notable for a couple of quarters. Growth in the fourth quarter of last year and first quarter of 2012 was slightly stronger than initially reported, while growth in the first quarter of 2011 was nearly revised away entirely. On net, the data show that the recovery has been slightly stronger than initially reported.

Some of the revisions to the components of real GDP were quite substantial. Government spending fell less than earlier reported and business fixed investment, both in equipment and structures, was much stronger than first reported. Consumer spending and residential investment were about the same as previously thought and there was less inventory building during the first three quarters of 2011, but much more inventory building in the fourth quarter of 2011 and first quarter of 2012. Moreover, inventory building picked up in the second quarter, accounting for one-fifth of the increase in second quarter real GDP growth.

The acceleration in inventory building during the past three months suggests that production will slow in coming quarters. This makes intuitive sense given the recent disappointing earnings announcements, many of which also contained reduced expectations for sales in coming quarters.
Consumer spending rose at a 1.5 percent annual rate in the second quarter, which was close to expectations. Spending on durables fell at a 1.0 percent rate, reflecting weaker motor vehicle sales. Spending on structures slowed from a 12.9 percent pace in the first quarter to just a 0.9 percent gain in Q2. The slowdown is likely due to reduced outlays for oil and gas exploration. Spending for equipment and software actually picked up slightly, climbing at a 7.2 percent pace, compared to a 5.4 percent pace in Q1.

The trade deficit widened by about $10 billion on an inflation-adjusted basis, with exports rising 5.3 percent and imports rising 6.0 percent. Both are expected to slow during the second half of the year. Government outlays fell at a 1.4 percent pace, with federal outlays falling at a 0.4 percent pace and state and local government outlays declining at a 2.1 percent pace.

The weaker second quarter data should have little impact on the Fed's deliberations. Our early read of the third quarter growth points to growth at around a 1.2 percent pace, which is where real final sales were in Q2.


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