Second Quarter GDP Revised Down to Disappointment

By TJ Kim

September 28, 2012

Yesterday, the final revision for GDP in the second quarter was released. As opposed to the consensus that forecasted the growth at 1.7%, the actual result revised down the growth rate to 1.3%, even slower than Q1 GDP growth. Accounting for the downward revision to Q2 GDP are consumption, structural investment and inventory.

Declines in both consumption and inventory seem to be major detractors to final GDP measure in the second quarter. Economics research team from Citi wrote in U.S. Macro Flash,

“About half of the revision was a downward adjustment to inventories (mostly farm inventories on the drought). The other half of the revision was domestic demand, revised to 1.4% from 1.6%… On balance, these data points continue to point to a sub-par 1 ½% gain in real GDP in 2H 2012, a step down from the early-year pace.”

Second quarter GDP does not bode well for second half of economic growth. There are no clear signs of deterioration as the leading economic indicators signal different direction for the future economy. However, what is worrisome is that there isn’t a clear sign of rebounding economy either, especially in times when economic growth is already sluggish. Global Markets Research from Deutsche Bank wrote in Data Flash,

“This trend is likely to continue into the second half of the year, as well. Overall, the combination of claims and GDP revision are mixed bag: Economic momentum is lower heading into the second half, but the all-important labor market does not appear to be deteriorating meaningfully further.”

Finally, QE3 may play some short-term booster in economic growth, especially in investment and consumption. However, not many have faith in the effectiveness of this non-conventional FOMC operation in the long run. Upon the release, 10-yr U.S. Treasury yield dropped back to the pre-QE3 announcement level at 1.62%.

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