Economic Insights - August 2015

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The U.S. economy rebounded in the second quarter from the supposed decline in real GDP in the first quarter. Our models indicate that when all is said and done, the

-0.2 percent reported in the first quarter will be revised to around +0.5 percent and the second quarter will ultimately be reported to have come in at 2.8 percent.

Here is our assessment of what really happened in the second quarter:

Let's start with consumption. Auto sales rose at a 12.4 percent annual rate in the second quarter. But "real" (inflation-adjusted) retail sales outside the auto sector were up at a 1.4 percent annual pace, and services, which make up more than two-thirds of personal consumption, grew at about a 1.8 percent rate.

So it looks like real personal consumption of goods and services, combined, grew at a 2.6 percent annual rate in the second quarter, contributing 1.8 points to the real GDP growth rate.

Business equipment investment was unchanged in the second quarter. But commercial construction rebounded sharply from weather-related problems in the first quarter, growing at a 22 percent pace, while we estimate that R&D grew around its trend of 5 percent. Combined, we estimate business investment grew at a 6 percent rate, which should add 0.8 points from the real GDP growth rate.

Now let's consider home building. Residential construction looks unchanged in the second quarter after surprising growth in the first quarter, despite the weather. That means it neither added to nor subtracted from GDP.

Then, there's government spending. Both military spending and public construction projects rebounded in the second quarter, suggesting real government purchases rose at a 2.8 percent rate, which would add 0.5 percentage points to real GDP growth.

What about trade? At this point, the government only has trade data through May, but the data so far suggest the "real" trade deficit in goods has gotten a little bigger. As a result, we're forecasting that net exports represent a drag of 0.1 point on the real GDP growth rate.

Finally, let's consider inventories. At present, we have even less information on inventories than we do on trade, but what we have suggests companies piled up inventories at a slightly slower pace than in the first quarter....

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