U.S. Q2 GDP Impresses: Is the Worst Over?

Who would’ve thought that the U.S. economy would leave GDP growth forecasts in the dust?

That’s right, folks! Economic growth in the U.S. during Q2 2013 far exceeded what analysts had predicted. Output grew by a solid annualized rate of 1.7%, well above the 1.0% consensus forecast. The upside surprise was a welcome sight after growth in Q1 2013 was revised down to 1.1%.

Diving into the details of the report, we see that business spending surged by 4.6% in Q2, completely undoing its losses from the previous quarter. Meanwhile, home construction spending notched another 13.4% increase, just as it did in Q1.

On a less positive note, federal government spending fell by 1.5%, following its massive 8.4% cut in the first quarter of the year.

Likewise, it was reported that growth in consumer spending, which accounts for about 70% of the U.S. GDP, slowed down in Q2 from 2.5% to 1.8%. Heavy importing, which outpaced exports in Q2, is also believed to have subtracted up to 0.8% from GDP growth.

Overall, even though average growth is still on the sluggish side, economists remain hopeful for the economy. The upside surprise suggests that the recovery is gaining momentum and that we may be underestimating its underlying strength.

In fact, there’s a lot of optimism for the U.S. economy in the second half of the year. Some believe we’ll see consumer and business spending pick up as the drag from government spending cuts subsides. This, they say, could take growth back up to around 2.5% in Q3 and Q4.

U.S. Dollar Index

Initially, the Greenback rallied on the very strong Q2 GDP. However, after traders had digested the news and realized that the Q1 figure was revised lower, the Greenback quickly reversed its gains and wound up exactly where it had begun.

Despite the “non-movement” of the Greenback, the Q2 GDP figure has strengthened the case for tapering. Unless you have been living under a rock, you’d know that the Fed has been hinting at the possibility of tapering towards the latter part of the year. And given how the GDP lined up nicely with the central bank’s economic outlook, we could very well see this happen.

This encouraging portrait of the economy was further reinforced when the ADP employment change showed that the U.S. had added a net total of 200,000 jobs in July. In addition, the June number was revised to the upside. Because the Fed has linked its monetary policy closely to employment, the solid ADP result should also raise expectations for the non-farm payrolls that is due to be released on Friday.

Now, if you’re concerned about the disagreement in the ranks with regards to tapering that was revealed in the most recent FOMC meeting minutes, let me remind you that Bernanke still ran through multiple quantitative easing programs in the past despite the opposition of his fellow policymakers.

For now, it seems that tapering is likely. But I guess we’ll just have to wait and see on September if the Fed’s truly going to pull the trigger!