U.S. GDP revised higher to 4.2%

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The U.S. economic growth was seen rising sharply during the second quarter of the year, which was more than previously estimated. The gains came despite a modest decline in a key measure of the corporate profits compared to the previous quarter.

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The real GDP which measures the value of all the goods and services produced in the economy was seen rising at an annual rate of 4.2% in the second quarter. The real GDP is adjusted for seasonality and inflation, data from the U.S. Commerce Department showed on Wednesday last week.

U.S. GDP Growth rate
U.S. GDP Growth, Q2 2018: 4.2% (Source: Tradingeconomics.com)

This was a higher revision compared to the preliminary estimates which showed a 4.1% increase. Economists polled had forecast that the U.S. GDP would be revised down to 4.0%.

Revisions to the growth in the second quarter came on account of stronger business investment which increased than previously estimated. Consumer spending was however modestly revised lower from the initial estimates. At 4.2%, the U.S. economy marked the strongest periods of growth in nearly four years.

The second quarter GDP follows a 2.2% increase during the first quarter. Output was seen expanding at a rate of 2.9% in the second quarter compared to the same period a year ago.

Corporate profits however moderated during the period in comparison to the first quarter. After-tax profits with inventory valuation and accounting for capital consumption adjustments rose just 2.4% in the second quarter. This came after the measure increased 8.2% in the first quarter.

Without inventory valuation and capital consumption adjustments, corporate profits increased to a seasonally adjusted rate of 3.7% from the previous quarter. This was, however, slower compared to the 8.5% increase in the first quarter.

When compared to the previous year, profits with inventory valuation and capital consumption adjustments increased strongly during the period, rising 16.1% on the year. This was the strongest yearly increase since the first quarter of 2012.

The gains came on the back of the tax legislation that was implemented in December last year. The tax cuts gave corporate a profit boost during the first quarter. However, this seemed to have eased by the second quarter. The U.S. administration slashed the tax rate to 21% from 35% starting January 1, 2018.

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The latest GDP report reinforced expectations that the U.S. economy performed strongly in the second quarter. Growth was seen coming in from all areas including consumer spending, higher exports, and higher business investment.

Consumer spending which accounts for two-thirds of the total economic output increased robustly during the period. Personal consumption expenditure rose 3.8% during the quarter. This was a slight downside revision to the 4.0% increase reported in the preliminary data.

Business investment was seen to be solid during the second quarter. The fixed non-residential investment was seen rising at an annual rate of 8.5%. This was higher compared to the initial estimates of 7.3%.

Net exports also contributed by adding 1.17 percentage points to the GDP growth during the quarter. This was also revised higher from the previous estimates of 1.06 percentage points.

The data bodes well for the U.S. Federal Reserve which is all but set to hike interest rates when it meets in September. Other measures of economic growth that are forward indicators suggest that the U.S. economy was still maintaining the momentum.

Following the second quarter revised GDP estimates the Atlanta Fed’s GDPNow model is forecasting a 4.6% growth during the third quarter of the year. However, in some corners, economists forecast that growth could slow in the coming quarters.

The main reason for a slowdown is the potential impact of higher trade tariffs that were imposed by the Trump administration. However, on the other hand, the U.S. economy is expected to narrow its trade deficit figures.

The GDP data came on the back of the consumer confidence report which showed that optimism among consumers hit an all-time high last week.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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