2nd Quarter GDP Revised Higher On Unusual Rise in Personal Spending

The Bureau of Economic analysis has revised 2nd quarter GDP upward to 3% from its original 2.8% advance estimate. The Commerce Department suggests the major cause of the revision was stronger than expected consumer spending and an upward valuation of business inventories.Ironically, the revisions came just two hours after discount retailer Dollar General blamed its below expected earnings report on a “financially constrained core consumer.”

The second-quarter growth showed an aggressive acceleration from the drowsy 1.4% growth reported in the first quarter. The Commerce Department credited a surge in personal consumption, which accounts for roughly 70% of U.S. economic activity, and was up 2.9% from 2.3% in the original estimate and well above consensus estimates of 2.2%.

The increase in consumer spending was mostly focused on health care, housing and utilities, gasoline and other energy, durable household equipment, and furnishings. Spending on recreation, and vehicle purchases were also credited.

The increase in inventory investment was partly due to higher valuations on existing inventories and partly on an increase in inventories related to expectations of a surge in back-to-school spending. Interestingly, while personal spending spiked, every other segment of the GDP was revised lower.

  • Fixed Investment was revised lower, to 0.64% from 0.53% a month ago.
  • A change in private inventories was also revised lower, from 0.82% to 0.78%.
  • Net trade subtracted from GDP expectations -0.77% from the originally reported -0.71%.
  • The government’s contribution to GDP was also revised lower, to 0.46% from 0.53%

The Commerce Department also reported that prices increased more than expected, up 2.5%, vs estimates of 2.3%, but substantially down from the 3.4% reported in Q1.

Thursday’s report reflects an economy that remains resilient though slowing as demand drives consumption, consumer debt rises, and government continues deficit spending. The rate of rising prices has slowed from a high of 9.1% in 2023 to 2.9% last month — still well above the fed’s 2% target.

What it means. Given the latest spending data, it’s NOT likely the Fed will reduce interest rates by the expected 50 basis points in September. Further, the expected 100 basis point cut expected in three increments during the balance of this year will likely be reduced to 75 basis points.

Despite last month’s inflation report of 2.9%, Fed Chairman Jerome Powell has essentially decided the risk of inflation is less worrisome than the weakening job market and the chance for recession.

The unemployment rate has increased for four straight months, and while a 4.3% unemployment rate is low by historical standards, most new jobs created over the last two quarters have been at the lower end of the economic ladder.