Monday, July 30, 2012

Soft US GDP, but is it soft enough for QE3?

US second quarter GDP came in at a seasonally adjusted rate (saar) of 1.5%, in line with market expectations which had been built on generally soft partial activity data over the quarter.  Of more interest than the June quarter itself was revisions to GDP data back to the first quarter of 2009.  In particular the fourth quarter of 2011 and first quarter of 2012 were revised up.  While other quarters were revised down, the overall picture is one of a recovery that is now slightly stronger than initially reported.
The components were all broadly as expected.  Consumer spending rose 1.5% (saar), held back by durables spending which declined on the back of weaker automotive sales.  Spending of business equipment and software picked up over the quarter to a 7.2% annual pace.   Exports were up 5.3% while imports rose 6.0%.  We still look to exports and business investment to be the leading sectors in the period ahead, although exports face global growth headwinds. 

The acceleration in inventory building over the quarter does not bode well for production in the period ahead.  An initial stab at Q3 GDP growth suggests it may well come in modestly weaker than Q2.

The Fed is clearly concerned about the slowdown in growth and the impact this has had, and may continue to have, on new job creation.  There is therefore nothing in this result to preclude them from pulling the trigger on more easing, should they of course decide the benefits outweigh the costs (see post below).  We will know more later this week.