How Will The FOMC Interpret Q2 GDP Data

By FX Empire Analyst - Barry Norman
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Today’s US GDP release for Q2 showed that the United States economy slowed in the second quarter amid weak consumer spending, government cuts and a rise in imports from foreign countries.

Gross domestic product, the broadest measure of the nation's economic health, grew at an annual rate of 1.5% from April to June, the Commerce Department said Friday. Although the actual was at 1.5% this is still a huge decline from the prior report at 2.00%. 

The Commerce Department also released revisions going back to the start of 2009. While the revisions showed that growth in 2010 was weaker than previously thought, 2009 and 2011 were slightly stronger.

Last year, Q2 GDP rose 1.3% (vs 1.8% exp) and most of the majors advanced vs the USD over the July 29, 2011 session, with the exception of CAD, which fell 0.6% following the release.    Any disappointment in US GDP will also heighten the focus on the Fed, given next week’s meeting and ongoing speculation with regards to the potential for new policy measures. Unfortunately today's release, just makes it all the more difficult to predict the Fed reaction.

There are several issues that need to be interpreted to try to understand what will come next.


One is the actual print (1.5%), two is the breadth of growth, and three is that we'll get annual revisions stretching back 3 years and hence to the start of an erratic but generally disappointing recovery. 

On the breadth of growth, recall that if the auto sector were removed from the 1.9% q/q annualized Q1 GDP prints then it would show an economy that fully stalled out by growing at less than 1%. 

Consensus expectations range from 0.7% to 1.9% and respected voices sit toward each end of the range that has a median and mean call of 1.4% and a standard deviation of 0.3% that in turn has most of the estimates clustered around the low- to mid-1% range.  Remember all the press the auto industry recently received over their increase in demand and production. Last weeks, unemployment was skewed by the new jobs and temporary positions created by the auto industry.

This will likely be the most influential of the remaining releases ahead of next Wednesday’s FOMC statement, but not the last one as Tuesday offers up personal spending and income as well as the Fed’s preferred inflation gauge (the PCE deflator) for June, and then Wednesday morning will bring forward the August ISM manufacturing and July ADP prints. 

Of interest is the nearly uncanny resemblance to this summer’s developments compared to last summer’s when US GDP growth of 0.4% in 2011Q1 then gave way to another weak print of 1.3% in Q2 and a worsening in eurozone and US fiscal and debt ceiling developments.

It should be an interesting week leading up to the July 31, and August 1st 2 day FOMC meeting.

No one can predict what Ben Bernanke and friends will do, and this release today, did not help much in helping to understand the thinking of the Fed.

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