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First Cut: Personal consumption carries advance estimate of second quarter GDP near high end of expectations

The advance estimate of second quarter GDP was up 2.1%, above the median expectation in market surveys. It was carried by personal consumption expenditures (up 4.3%), particularly in a rebound of spending on durable goods (up 12.9%) although nondurables (up 6.0%) and services (2.5%) had solid gains as well.

The other major contributor to growth in the second quarter was in government spending (up 5.0%). There was a surge in federal nondefense spending (up 15.9%), but national defense spending was up as well (up 2.8%). Additionally, state and local spending increased (up 3.2%).

On the down side, nonresidential fixed investment declined (down 0.8%) and residential investment was off as well (down 1.5%).

Net exports widened to -$661.7 billion in the second quarter on a decrease in exports (down 5.2%) and nearly flat imports (up 0.1%).

The change in private inventories (up $75.9 billion) was restrained by a decline in farm inventories (-$10.6 billion) that was similar to the last few quarters.

The composition of the report was much as anticipated. In spite of the evidence that growth in the second quarter was in line with the FOMC’s current forecast for 2019 of up 2.1%, it probably will not prevent the Committee from providing a preemptive rate cut in the face of a number of risks to the outlook for the economy. It will, however, likely convince the consensus that a 25 basis point cut is sufficient and even lead them to decide that further rate actions can remain on hold until the data counsels otherwise. Backing this up is a signal that recent inflation readings in the PCE deflator that have run noticeably below the 2% objective may start to rise again. While the FOMC does not use the GDP price indexes as a major gauge of inflation, the leap in personal consumption to up 2.3% from 0.4% in the first quarter and core personal consumption to 1.8% in the second quarter from 1.1% in the prior quarter suggests that perhaps the PCE deflator is going to rise as well.

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