While Q2 GDP Is Revised Up, Expectations for Q3 GDP Start to Take Shape

Wednesday’s economic reporting brought the first revision to second-quarter gross domestic product (GDP). The preliminary report showed 4.1% GDP growth in the United States, and the revision ticked higher to 4.2%.

Everyone needs to keep in mind that the generalization is that roughly two-thirds of GDP reports are tied to consumer spending, and that measurement ticked lower. And despite a very strong earnings season in the second quarter, corporate profits were shown to have moderated from the first estimate. Stronger business investment helped lift the GDP numbers.

Aftertax profits with inventory valuations and capital consumption adjustments were up 2.4% in the second quarter, versus a gain of 8.2% in the first quarter of 2018. The Bureau of Economic Analysis also reported that aftertax corporate profits without the previously mentioned adjustments rose by a seasonally adjusted 3.7%, compared with a gain of 8.5% in the first quarter. What stands out here is that the “with adjustments” report compared to the second quarter of 2017 was up 16.1% for the largest gain dating back to early 2012. And the boost from tax reform seems to have moderated if you look at the benefits from the first quarter compared to the second quarter.

Fixed nonresidential investment, or business investments, were revised up to 8.5% from the preliminary view of 7.3%.

Another boost came from net exports, which added 1.11 percentage points, compared with a preliminary estimate of 1.06 percentage points.

This also translates into major numbers in raw dollars for more than a $20 trillion economy. The current‑dollar GDP increased 7.6%, or $370.9 billion, in the second quarter to a level of $20.41 trillion, versus a 4.3% gain, or $209.2 billion, in the first quarter. The price index on gross domestic purchases also rose by 2.3% in the second quarter, versus a gain of 2.5% in the first quarter. The personal consumption expenditures (PCE) price index increased by 1.9% in the second quarter, versus a gain of 2.5% in the first quarter. Excluding food and energy prices, the PCE price index increased by 2.0%, compared to a 2.2% increase in the first quarter.

While the increased numbers of one quarter tend to force economists into thinking that the next quarter trends will be strong, many of the gains in the business side of the economy were coming in ahead of the tariffs and trade war issues that have persisted in recent weeks. That said, the most recent consumer confidence reading, released a day earlier, showed a greater-than-expected increase after having previously declined, and the expectations in the coming month also rose.

Many investors, business owners and consumers will be wondering how all this adds up as we look forward to the third-quarter numbers. The stock market has risen to all-time highs and consumer spending from the retail earnings reports is looking stronger now. The Atlanta Federal Reserve Bank’s GDPNow estimate for the third quarter was 4.6% as of August 24, 2018. And the Federal Reserve Bank of New York’s “Nowcasting Report” shows that the third-quarter GDP target is currently a 2.0% gain, after recent data up to August 24 decreased the estimate by 0.4 percentage points.