The U.S. economy grew sat a omewhat better than expected during the second quarter of 2012, according to a revised estimate issued by the Commerce Department for the country’s quarterly Gross Domestic Product (GDP).

us economic growth

U.S. Gross Domestic Product Growth grew by a 1.7 percent annual rate in the second quarter compared to a 2 percent rate in the first quarter. The earlier estimate for the first quarter was for 1.5 percent.

The reading of the  Gross Domestic Product Growth provides an inkling that Fed Chairman Ben Bernanke may need to initiate a third round of quantitative easing (QE3) to further boost the U.S. economy into a higher growth trajectory.

It might not be out of place here to include a short primer on the above economic indicator known as GDP and why the preliminary reading for the second quarter was adjusted upwards.

What is the Gross Domestic Product (GDP)?

Simply put, GDP is a measure of the overall output of goods and services in the U.S. economy during a particular period. The Gross Domestic Product Growth indicates the overall health of the economy and its constituents provide an insight into the interplay of various forces that shape the economy.

A high rate of GDP growth indicates a healthy economy, but the increased activity could result in inflation and rising inflation. Central banks become ‘hawkish.’ This currently does not seem to be a concern, as the global economy slows, Central Banks are more concerned about deflation. On the other hand, poor GDP growth indicates a worsening economy marked by unemployment and reduced economic activity. In this case central banks become ‘dovish’ and are inclined to reduce interest rates, or if that is no longer feasible, to consider other tools such as quantitative easing.

Read this excellent resource “Measuring the Economy – A Primer on GDP and the National Income and Product Accounts” here.

Calculation and dissemination of GDP

The U.S. GDP is computed by the Commerce Department and its Bureau of Economic Analysis. Usually a preliminary (or, advance) estimate is later followed up by a revised estimate as better information becomes available.

For the second quarter, the revision of GDP from 1.5 percent to 1.7 percent took place due to:

  • A downward revision to ‘imports’ for goods according to data for May and June.
  • An upward revision to ‘consumer spending’ primarily due to ‘services’ such as electricity and gas.
  • A downward revision to ‘inventory investment’ composed of higher retail trade inventories, lower wholesale trade inventories, and lower mining, utility and construction inventories.

All eyes are now on Ben Bernanke’s speech tomorrow at Jackson Hole and Q3 GDP numbers.