US GDP figures for Q2 were much better than expected, but GDP growth in Q1 was revised down as part of the benchmark revisions. Though first half GDP growth came in roughly in-line with street expectations, the momentum is now looking much better according to According to Societe Generale analyst Aneta Markowska.

Aneta notes that more importantly, the impact of fiscal restraint now appears to have peaked in Q1, in-line with original expectations at the start of the year. Consumer spending has held up remarkably well in the first half of the year in light of the earlier tax increases; however, business spending now appears to have been much weaker, averaging at zero growth in Q1 and Q2. Trade shaved 0.8% from Q2 growth while inventories added 0.4%. Netting out those two effects, final sales to domestic purchasers were up 2.0% in Q2 after 0.5% in Q1, suggesting improving momentum in domestic demand.

After revision GDP growth toughend

US GDP improving

While the US economy undoubtedly slowed down in the first half of the year, growth seems to have troughed in the first quarter and momentum is already improving. We attribute much of the slowdown at the start of the year to fiscal restraint. We have been arguing for some time that the impact of the sequester was front loaded, and the new data corroborates that view. Despite the fact that the automatic spending cuts kicked in only on March 1, federal spending contracted sharply in Q4/Q1 (by -13.9% and -8.4% respectively) and appeared to stabilize in Q2 with a contraction of just -1.5%. Defense spending cuts in particular appear to have occurred in anticipation of the sequester, while nondefense discretionary spending was cut equally in Q1 and Q2 (by -3.6% and -3.2% respectively). As for the impact of fiscal consolidation on consumer spending, the fallout still appears to have been limited. Consumer spending was up 2.3% in Q1 and
1.8%, with the recent slowdown probably attributable to higher gasoline prices.

GDP growth trajectory