Q2 GDP Growth at 2.4 Percent – Consumption Growth Still Modest

Second quarter real GDP growth came in at 2.4% annualized rate. This followed an upwardly revised first quarter growth rate of 3.7% (previously 2.7%). The first quarter upward revision was balanced out by downward revisions to growth in the second half of 2009. The economy continues to grow, however, the rate of growth is slowing down. On a year-ago basis, real GDP grew 3.2%.

The quarter’s growth was primarily driven by a solid increase in fixed business investment. The equipment and software component was particularly strong, though non-residential construction also added to growth slightly. In total, non-residential fixed investment added 1.5 points to GDP growth. Consumption continued to grow, but only modestly, adding 1.2% to growth. Likely in part due to fallout related to the European sovereign debt crisis, net exports were a huge drag on growth for the quarter, taking 2.8% off of the total as imports grew far quicker then exports.

As in past quarters, inventory investment continued to add significantly to growth, adding 1.1 points to the total. However, this is a deceleration from the prior two quarters which added 2.6 and 2.8 points to growth. Real final sales, which removes the effects of inventory investment in order to obtain a measurement of current aggregate demand, rose 1.3%. This compares to a growth rate of 1.1% in Q1. The inventory readjustment phase in the early stage of recovery is coming to an end and growth moving forward will track real final sales more closely. As such, without greater improvement in consumption growth, GDP expansion will likely be quite modest in the upcoming quarters and unable to really drive the unemployment rate downward.

Source: Bureau of Economic Analysis