Real GDP increased by an annualized 3.0% in the second quarter of 2017 according to the second BEA estimate (previously reported as a 2.6% gain). This was well above the consensus expectation for a 2.7% uptick.

The bulk of the upward revision was related to stronger consumption spending, which grew by 3.3% (prev. 2.8%). Growth was led by durable spending which rose 8.9% (prev. 6.3%) but the remaining spending categories also performed better than previously reported.

The remainder of the upward revision was related to nonresidential fixed investment, which increased by 6.9% (prev. 5.2%). The upward revision was most apparent in intellectual property which increased by 4.9% (prev. 1.4%) and structures which expanded by 6.2% (prev. 4.9%), while equipment spending was revised higher only slightly to 8.8%.

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Residential investment subtracted less than previously thought, contracting by 6.5% (prev. -6.8%) as did net exports which totaled -$613.4bn (prev. -$614.9bn). Inventory investment was a touch higher at $1.8bn (prev. -$0.3bn).

The only major component to be revised down was government, which declined -0.3% (prev. +0.7%) as federal (1.9% vs. 2.3% prev.) spending provided less lift while state and local (-1.7% vs. -0.2% prev.) spending was more of a drag.

The GDP and PCE price deflators were little changed, increasing by 1.0% and 0.9% annualized in the second quarter.

Corporate profits (after IVA and CCA) increased by $26.8bn (1.3%) in the second quarter after a decrease of $46.2bn (2.1%) in the first quarter.

Key Implications

This morning’s report suggests that the U.S. economy is on a more solid footing than previously thought with growth revised up more than expected – albeit on par with our own call. Even more encouraging was the breadth of the revisions with all segments of the economy, aside from government, in better shape than previously reported. The revision to consumer spending was the highlight of this report, indicating that the consumer, helped along by strong job and income growth, has definitely woken up after the first quarter lull.

We expect the strength of consumer and business spending to continue into the third quarter. However, the current devastation in Southeast Texas is likely to hit growth in the third quarter, with economic activity substantially disrupted in the Houston, Victoria, and Corpus Christi metro areas. Both consumer spending and business investment are likely to sustain weaker performance as a result, but most of the drag is likely to come from net exports – with refined product exports hard hit given the outages of Gulf Coast refineries and ports shuttered. We expect Harvey to slow GDP growth by anywhere between 0.1 and 0.4 percentage points, with Q3 growth likely to come in in the 2.5% to 3.0% range given current tracking. For a more detailed analysis of the impact of Hurricane Harvey click here.

This report should help solidify the notion that the U.S. economy remained resilient through mid-year and is well positioned to expand in the second half of 2017 and embolden Fed hawks to suggest additional rate rises. Still, the weak inflation figures remain a constraint at this point. We don’t expect these to show much progress until later in the year and consequently feel that Fed is unlikely to act until at least December.


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