US Second-Quarter 2013 GDP Growth Stronger than Expected
- The first estimate of US second-quarter 2013 annualized gross domestic product (GDP) growth was a stronger than expected 1.7% although this followed a downwardly revised 1.1% gain in the first quarter of 2013.
- The upward surprises in the month were in government, private fixed investment, and inventories with some offset from weaker net exports.
- Historical revisions resulted in a limited net effect on growth for most of the historical period except for 2102 when the annual growth saw a sizeable upward revision to 2.8% from a previously estimated 2.2%. As well, the savings rate was revised higher from the late 1980s that reflected higher personal income estimates. This resulted in the first-quarter 2013 savings rate being raised to 4.0% from the previously estimated 2.5%.
- The persistence of sub-potential growth in the first half of 2013 is disappointing. Tax increases in January and the forced government expenditure cuts, i.e., sequestration in March, clearly took their toll on growth. This restraint, however, is expected to ease as we move into the second half of 2013. Our forecast assumes that GDP growth will return to an above-potential rate for the remainder of this year and through 2014. Confirmation of growth strengthening to an above-potential rate is expected to result in the Fed starting to reduce asset purchases. The statement to be issued this afternoon following the conclusion of the Federal Open Market Committee (FOMC) meeting will be monitored for confirmation of this timing.
The first estimate of second-quarter 2013 annualized GDP growth of 1.7% was much stronger than the 1.0% expected by financial markets. This resulted in growth strengthening in the quarter although this largely resulted from the first-quarter 2013 growth rate being revised downward to 1.1% from the previous 1.8%. This downward revision was largely the result of a massive lowering in business investment on structures to a decline of 25.7% from the previously estimated drop of 8.3%. The average growth between the two quarters of 1.4% was in line with expectations of sub-potential growth persisting in the first half of 2013.
The second-quarter 2013 numbers contained several areas that showed greater than expected strength. Non-residential investment rose 4.6%, which was more than double the increase that we expected although the increase followed the much larger decline in the first quarter of 2013. Residential investment managed to maintain a double-digit growth rate of 13.4% rather than slowing to 3.7% as we expected. Although government spending continued to decline, the reported second-quarter 2013 drop of 0.4% was only a fifth of the 2.0% decline that we had expected. Rising inventories managed to add 0.4 percentage points to growth rather than subtract 0.3 percentage points as we expected. Finally, growth in consumer spending of 1.8% was marginally stronger than the 1.7% that we had expected.
The main offset to these upward surprises was net exports that subtracted 0.8 percentage points from the second-quarter 2013 growth rate rather than having no net effect as we had expected. This resulted from both import growth coming in stronger than expected (9.5% compared to 7.1%) and export growth weaker than expected (5.4% compared to 8.9%).
Along with the release of the advance second-quarter 2013 GDP estimate, the Bureau of Economic Analysis also released its comprehensive revisions to the historical GDP data (back to 1929). Comprehensive revisions are wider in scope than normal annual benchmark revisions because they often include the re-definition of concepts and are typically conducted at five-year intervals. The level of nominal GDP was revised higher by around 3.5% through the data's history as a result of this year's revision (revised upward by 3.4% in the first quarter of 2013), largely reflecting the capitalization of intellectual property investment and an expanded list of residential, fixed-asset, ownership-transfer costs (most of these variables were formerly defined as “intermediate inputs” and thus not included in estimates of GDP). The revisions generally reflected a level shift as the quarterly (and annual) growth profiles for real GDP were not materially revised outside of recent history with 2012 growth revised upwardly to 2.8% from 2.2%.
Another significant change is that defined-benefit pension plans will now be evaluated on an accrual rather than cash basis. The change does not have a significant effect on the level of GDP; however, there were significant shifts in the share of income allocated to households. The size of the revision to household income varies from year to year, but personal saving was revised up by $200 billion in the first quarter of 2013, thereby resulting in the savings rate jumping to 4.0% from the previously reported 2.5%.
The persistence of sub-potential growth during the first half of 2013 is disappointing. Tax increases in January and the forced government expenditure cuts, i.e., sequestration in March, clearly took their toll on growth. This restraint, however, is expected to ease as we move into the second half of 2013. This implies both a strengthening in consumer and business spending, and an easing in declining government spending. Activity going forward is also expected to be helped by continued solid employment gains. In total, our forecast assumes that GDP growth will return to an above-potential rate for the remainder of 2013 and through 2014. Confirmation of growth strengthening to an above-potential rate is expected to result in the Fed starting to reduce asset purchases. Our forecast assumes that the so called tapering will start sometime this fall with purchases terminating by the middle of 2014. The statement to be issued this afternoon following the conclusion of the FOMC meeting will be monitored for confirmation of this timing.