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Highlights
The economy is coming closer to the end of recession based on the advance estimate for second quarter GDP. The economy contracted in the second quarter by only 1.0 percent, following a revised 6.4 percent drop in the first quarter. The second quarter was close to the market consensus for a 0.7 percent dip. Today's report contains historical benchmark revisions to GDP. The previous estimate for the first quarter decline was 5.5 percent.
Weakness in the current quarter was almost offset by component strength. Pulling down GDP in the latest quarter were business fixed investment, housing, personal consumption, and inventories. Strength was found in a sharp narrowing in the trade gap and a rebound in government spending.
But what led to an easing in the rate of decline-where was the second derivative positive? The slowing in the rate of decline in the latest quarter was due to a slowing in the decline in inventories, less negative business fixed investment, less negative housing, a gain in government spending, and a narrowing in net exports. The big negative was a drop in personal consumption.
Year-on-year growth for real GDP declined by 3.9 percent, after contracting 3.3 percent in the prior quarter.
On the inflation front, the GDP price index rose a meager 0.2 percent after gaining a revised 1.9 percent in the first quarter. The first quarter increase previously had been estimated to be 2.8 percent annualized. The consensus had expected a 1.3 percent gain for the second quarter.
The historical revisions to GDP broadly show the current recession was deeper than earlier believed. All but one quarter of the recession were revised down.
Looking ahead, low inventories point to a rebound in production in the third quarter with motor vehicles almost certainly to be a sizeable contribution. However, the consumer will likely lag. Markets should like today's numbers since it strengthens the case for a rebound in the second half and possibly even the third quarter. However, heading into equity open in the U.S., traders were focusing more on the dip in consumer spending and were looking in the rear view mirror, noting the recession was worse than believed.
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Market Consensus Before Announcement
GDP growth in the first quarter was revised up marginally to an annualized 5.5 percent contraction from the prior estimate of a 5.7 percent decline. Turning to inflation, the GDP price index for the first quarter came in at an annualized 2.8 percent. Now we get our first look at second quarter GDP and the big question is whether the hoped-for deceleration in contraction is significant. Also, we will get to see the BEA's benchmark revisions to historical GDP. These updates are not just annual revisions but rebase real GDP from year 2000 chain dollars to 2005 chain dollars. There will be significant methodology changes in several categories-especially personal income and personal consumption. Overall, we'll have a better idea of how deep the recession has been.
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