U.S. Economic growth was stronger than expected in the second quarter, according to preliminary gross domestic product (GDP) report from the Bureau of Economic Analysis.
The second reading of U.S. GPD showed that the economy expanded by 3.7% in the second quarter, up compared to the initial reading of 2.3%. Optimism was fairly high that the second estimate would show a substantial increase from the initial reading and also from the first quarter’s increase of 0.6%. According to consensus estimates, economists were forecasting an increase of 3.2%.
"The acceleration in real GDP in the second quarter reflected an upturn in exports, an acceleration in PCE, a deceleration in imports, an upturn in state and local government spending, and an acceleration in nonresidential fixed investment that were partly offset by decelerations in private inventory investment, in federal government spending, and in residential fixed investment," the report said.
In initial reaction, the stronger than expected data pushed gold prices to its session low at $1,119 an ounce.
Along with improved economic conditions, inflation pressures appear to be increasing as well. According to the second estimate, the price index for gross domestic purchases increased by 1.5%, up slightly from the 1.4% increase reported in the initial report. The price index is dramatically higher from the first quarter, which showed a drop of 1.6%.
Stripping out volatile food and energy costs, the price index rose 1.2%, up from the initial increase of 1.1% and higher than the first quarter's increase of 0.2%.
Looking at some of the components of the report, personal consumption expenditures saw an improvement in the second reading, increasing by 3.1%, up from the initial reading of 2.9% and up from 1.8% in the first quarter.
Real exports saw a slight drop in the updated GDP report, showing an increase of 5.2%, down from the initial reading of 5.3%; however, the trade data is still a vast improvement from the first quarter which showed a decline of 6%.
Imports were also lower in the preliminary report, increasing 2.8% in the second quarter, down from the initial estimate of 3.5% and considerably lower compared to the first quarter increase of 7.1%.
Not only does the data show broad-based strength in the economy, Millan. Mulraine, deputy chief U.S. economist at TD Securities, said that the gains were the result of improving performance in the later half of the quarter and could bode well for third quarter growth.
Mulraine added that the positive data doesn't necessarily translate into a rate hike in September.
"This strong positive revision to Q2's GDP performance will be welcome news at the Fed, and it will be interpreted as further evidence that the economic recovery is on much firmer footing that previously though," he said. ". Nevertheless, the key to the monetary policy stance in the near term will not be past growth or inflation performance, but the outlook for both. And given the recent financial market volatility and the lingering anxiety about global growth, the outlook for both is now more uncertain and tilted to the downside. This will provide the pretext for the Fed to take a pass on raising rates in September."
However, not all economists believe that a September rate hike is off the table. Paul Ashworth, chief U.S. economist at Capital Economics, said that the central bank could be in somewhat of a dilemma.
"Back in June officials were split on whether to raise rates once, twice or even three times this year, even when they were forecasting that GDP growth would be as low as 1.8% to 2.0%," he said. "Yet because of the recent global stock market wobble, officials have found another excuse to delay raising interest rates. We don’t think a September rate hike is completely off the table, but we’ll just have to wait and see what officials have to say at this weekend’s Jackson Hole gathering."
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