US: Sharp GDP Downgrade Follows Historical Data Revision

Consensus Forecasts

The advance Q2 national accounts showed heavy revisions to the historical data, including 2012 GDP which is now estimated to have expanded by 2.8% instead of 2.2% previously. This no doubt contributed to this month’s downgrade of the 2013 GDP forecast. GDP accelerated from 0.1% (q-o-q annualized) in Q4 2012 to 1.1% in Q1 2013 and a further 1.8% in Q2. The Q2 outturn was in line with what the consensus had been expecting, but the Q1 figure of 1.1% was revised down from a previous 1.8% as tax hikes and fiscal sequestration slowed activity. The fiscal drag was not as pronounced in Q2: the 1.5% annualized decline in Federal government spending compared with an 8.4% contraction in Q1 and 13.9% plunge in Q4 2012 (due to sharp cutbacks in defense). GDP was helped by disposable income as well as business investment. On the weaker side, net exports subtracted substantially from growth as global weakness prevailed, and US consumers moderated their pace of spending from 2.3% (q-o-q annualized) to 1.8%. Consequently, our panel’s 2013 consumption forecast has dropped.

The national accounts were rebased and revised back several decades, and GDP will now incorporate more of the knowledge economy, including intellectual property, as part of R&D investment. The Fed responded to the Q2 GDP release by underscoring the still-soft growth environment, rising mortgage rates and prevalent lack of inflation in the economy. The Fed revised its assessment of growth from a “moderate” to “modest” expansion, but the FOMC is unlikely to deviate from eventually tapering the pace of its US$85bn-a-month asset purchasing programme. Some predict that this could occur as early as September.

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