Strong Labor Market Helps 2nd Quarter GDP Beats Consensus

If there's one strength that is most important for the economy, it's personal consumption expenditures which along with government spending held up second-quarter GDP to a 2.1 percent annual rate that beats Econoday's consensus by 2 tenths. Beating Econoday's consensus by 4 tenths is inflation-adjusted consumer spending which came in at a very hot 4.3 percent pace. This is directly tied to the strength of the labor market. Government purchases, here tied to heavy government spending, grew at a 5.0 percent pace. Consumer spending contributed 2.85 percentage points to the quarter's growth while government purchases contributed 0.85 points.

All other major components pulled down GDP which is what Federal Reserve policy makers, who are now biased strongly toward a rate cut, will have to underscore at their meeting next week. But inventories are tricky to nail down. Growth here slowed in the quarter and pulled GDP down by 0.86 points -- but the lower rate of inventory build may be a blessing in disguise should domestic demand remain strong and businesses then in turn accelerate their builds which would add to jobs and production.

Less tricky negatives include nonresidential fixed investment which ends a long run of strength with a minus 0.6 percent second-quarter pace that pulled GDP down but not that much, by minus 0.08 points. Business structures, where data are often volatile, were the weakness here with equipment a small positive and intellectual property a strong positive.

Residential investment is once again a major disappointment in the report, falling for the sixth quarter in a row and this time at a 1.5 percent pace to pull GDP down but only slightly by 0.06 points. Net exports, reflecting a deepening trade deficit, are also a negative and were a 0.65 point negative contribution, though this component could turn around in the ongoing quarter should imports slow.

Though the dip in nonresidential investment does fit with the Fed's main concern which is weakness in business investment, this report doesn't speak to any urgency for new monetary stimulus. Price data are another upbeat aspect of the report, rising solidly to 2.4 percent for both the overall index and the core. Today's report includes revisions and though the first-quarter is unrevised at a 3.1 percent overall pace the fourth-quarter is revised in half, down to a 1.1 percent pace.