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Economic Growth Revised Higher

The upward revision in the headline second-quarter gross domestic product (GDP) gain to 3.1% from 2.4% was almost exactly in line with our 3.0% estimate, especially if we note the unexpected downward bump in the chain price gain to 0.8% from the 1.0% increase reported earlier. But the component mix bodes well for the second half of the year, as inventories were weaker than expected, while unexpected upward revisions were seen in business fixed investment and state and local government spending.

Inventories were revised downward by $3 billion in the second quarter, thus leaving a sizable $25.7 billion subtraction to GDP from already-lean levels, as robust 4.0% growth in final sales in the second quarter, vs. the prior 3.2% estimate, caught leary business managers off-guard. The revisions included several expected shifts that boosted sales, including a bump in consumption growth to 3.8%, an upwardly revised export figure that leaves only a 1.2% second-quarter rate of decline, and a downwardly revised import growth rate of 7.9%.

But also, we saw a faster 6.9% growth rate in fixed investment, as a boost in business spending offset an expected downward shift in residential investment, and second-quarter government spending growth is now a robust 8.2%. We now estimate real GDP growth in the third and fourth quarters at 5.5% and 5.0%, respectively. From MMS International

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