–Q2 Rev Includes More Consptn, Inventories; GDP overall prices +1.9%

By Joseph Plocek

WASHINGTON (MNI) – The latest revisions to Q2 GDP were about as
expected, putting the real growth rate at +1.7% with more consumption
and inventories. But incoming data point to an even better gain in Q3 as
the consumer steadies and business investment in capital goods appears
to have picked up more. The prior estimate had Q2 real growth at +1.6%.

Q2 now includes upward revisions to inventories and consumer
spending, offset by more imports. New services data from a survey put
services consumption spending at +1.6%, its best since early 2008 and a
huge improvement from +0.1% in Q1. The new imports data included a
revised adjustment for gold, which has been soaring in price recently,
hence helping raise the real level of other imports.

Key to Q2 growth remain the surges in residential investment at
+25.7%, a typical recovery after recession as individuals go bargain
hunting for homes, and a 24.8% jump in business equipment and software
spending. This year the up-move in residential spending was helped by a
tax credit that expired in the spring.

The gain in business spending is harder to explain in an economy
faced with massive slack. But good corporate profits appeared to drive
equipment upgrades that will maintain productivity.

Real final sales were +0.9% in Q2, down 0.1 point from the prior
estimate. Final sales surged in Q4:2009 and seem to be on a lesser glide
path into 2010. A future pickup might come from additional income growth
or more government stimulus.

The basic recovery story remains the same: the inventory cycle is
ending and investments are picking up the slack. Q3 growth will depend
importantly on getting the consumer to spend in order to continue this
virtuous cycle.

Government spending was up in Q2. Federal spending advanced 9.1% on
both defense and nondefense spending, and state and local spending was
up 0.6% after -3.8% in Q1. The outlook for these sectors is cloudy:
federal might be hurt if tax cut extensions are not enacted, and state
and local budgets might be cut in austerity moves if real estate prices
do not move up sufficiently. This poses another risk to future growth.

Corporate profits pre-tax advanced $15.3 billion in the revision,
with financial firms and utilities industries losing, and
rest-of-the-world profits decreasing from Q1. The overall gain is down
from +$224.5 billion in Q1. Still, corporations are better able to
finance in the capital markets, giving hope that their spending can
continue.

Profits from current production printed +$47.5 billion in Q2 after
+$148.4 billion in Q1.

Price indices were modest. The overall GDP price index printed
+1.9% after +1.0% in Q1. Core PCE prices printed +1.5% after +1.8% in
Q1.

GDP Components: Q4:09 Q1 Q2
Real growth +5.0% +3.7% +1.7%
Real final sales +2.1 +1.1 +0.9
PCE +0.9 +1.9 +2.2
Nonres fixed invest -1.4 +7.8 +17.2
Res fixed invest -0.8 -12.3 +25.7
Net Exports Contrib add 1.90 cut 0.31 cut 3.50
Inventory Contrib add 2.83 add 2.64 add 0.82

**Market News International Washington Bureau: (202)371-2121**

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