US GDP rose 3.7% annualized in the second quarter

US real GDP increased by an annualized 3.7% in the second quarter of 2015 according to the second estimate, up strongly from the 2.3% reading published with the advance estimate. Moreover, the performance was well above market expectations which called for growth to be revised up to 3.2%. Upward revisions were had across the board. Consumption (3.1% vs. 2.9% previously) was revised higher on better performance from both durables and nondurable goods, while services spending was a touch weaker (2.0% vs. 2.1%). Fixed investment in nonresidential structures (3.1% vs. -0.6% prev.), equipment (-0.4% vs. 4.1% prev.), IPP (8.6% vs. 5.5% prev.), and residential structures (7.8% vs. 6.6%) were also revised up, while the build in inventories was higher at $121bn (vs. $110bn previously).

Even government spending (2.6% vs. 0.8%) was higher on better federal and state & local expenditures. Lastly, net exports also provided more of a contribution with import growth revised down from 3.5% to 2.8%. Price deflators for GDP and PCE were not materially revised, up 2.1% (prev. 2.0%) and 2.2% (unch.), respectively. Corporate profits (with IVA and CCA) rose by 2.4% after two consecutive quarterly declines over previous quarters.

This is the kind of report that makes an economists' morning. After a lackluster start to the year, during which growth averaged just 0.6% annualized, the 3.7% during Q2 is a welcome relief, with both the sheer magnitude of the acceleration and the breadth of the improvement indicating that the U.S. economy is in fact on a solid growth trajectory. To be fair, some of the strength in Q2 was effectively borrowed from Q1, as transitory factors that kept economic activity subdued in Q1 (heavy snowfall and port disruptions) dissipated. Still, the 2.2% average over the first half of the year is nothing to scoff at, especially in light of the fact that it happened amidst a surging dollar and severe cuts in energy related investment. 

"We expect some further drag from energy investment and the elevated greenback to continue to weigh on the U.S. economy. At the same time, low (and falling) gasoline prices, rising employment and income, and improved household wealth should enable the U.S. consumer to carry the economy forward, with additional strength sourced from residential investment. As such, we expect U.S. economic growth to settle into a very comfortable 2.5% to 3% pace over the coming quarters, manifesting in a further reduction in economic slack", notes TD Economics.