GDP Rebounds and Stocks Soar

Dow and S&P 500

Both have given back their gains from earlier this morning, but the Nasdaq still remains in the green. The volatile trading this morning, however, cannot change the fact that the advance reading of US GDP for the second quarter showed a stronger-than-expected gain of 4% compared to an upwardly revised -2.1% contraction in Q1 (vs. -2.9% originally reported). Full details of the report can be found here. The news also followed ADP’s employment report for July that showed a gain of 218,000 jobs — largely in line with expectations, but down from June’s 281,000 gain.

The Bureau of Economic Analysis (the government entity responsible for the GDP report)

claimed that the increase in Q2 GDP was largely the result of increased consumer spending, or personal consumption expenditures (PCE), as well as gains in private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment.

Consumer spending

This accounts for about two-thirds of US economic activity, increased 2.5% in Q2 vs. a 1.2% increase in Q1. This increase in Q2 was largely the result of long-lasting durable goods, which jumped 14% (vs. just a 3.2% increase in Q1).

Despite this increase in consumer spending, it was reported that the personal savings rate rose to 5.3% from 4.9% as incomes rose. Many economists claim that this increased savings rate should help future spending.

Gross private domestic investment (see: fixed investment in residential and nonresidential) also showed a dramatic gain in Q2 compared to Q1. For example, overall gross private domestic investment grew 17% in Q2 vs. a contraction of -6.9% in Q1. Nonresidential investments were up 5.5%, while residential investments were up 7.5% in Q2, compared to 1.6% and -5.3%, respectively.

Meanwhile, net exports were down again in Q2 as the US imported more goods than it exported. For example, real imports of goods and services increased 11.7% vs. a 2.2% increase in Q1, while real exports of goods and services increased 9.5% vs. a decrease of -9.2% in Q1.

Lastly, inflation pressures increased as it was reported that the price index rose 2.3% — the quickest in three years — after advancing at a pace of 1.4% in Q1. After stripping out food and energy costs, this “core” price index showed a gain of 2.0%  — the fastest since Q1 2012 — after rising 1.2% in Q1.