US GDP undershoots in second quarter but revisions compensate

Economic activity in the US climbed in the second quarter of the year to a reach an annualised pace of 2.3%.

Analysts had pencilled in a rate of expansion of 2.5%.

However, the pace of growth for the first three months of the year was revised up to show a gain of 0.6% instead of the previous estimate which revealed a contraction of 0.2%, according to the Bureau of Economic Analysis.

Data raise the odds of the Fed hiking interest rates in September

Government expenditures increased by 0.8% as a 1.1% drop in federal spending largely offset a 2% rise at the state and local level.

A new category included with today’s release which aims to reflect private demand in the economy expanded at a 2.5% pace in the second quarter following an advance of 2.05 at the start of the year.

Consumer spending sped ahead at an annualised rate of 2.9% (consensus: 2.7%) after growing 1.8% at the start of the year. That added two percentage points to the pace of growth.

However, investment excluding housing shrank by 0.6% - its worst performance since the third quarter of 2012.

One of the US central bank’s preferred inflation gauges, the so-called deflator for personal consumer expenditures, accelerated to a 1.8% pace after readings of 1% over each of the prior two quarters.

The yield on the benchmark 10-year US Treasury note edged higher by one basis point to 2.29% in reaction to the above data.

Data removes doubts for Fed, Markit says

"Updated GDP numbers deliver a double-punch to US economy doom-mongers, painting a reassuringly bright picture of the health of the US economy so far this year and raising the odds of the Fed hiking interest rates in September.

“The new data, and the first quarter revisions in particular, remove a worrying sense of doubt about the health of the economy that will have given cautious policymakers a reason to hold back on hiking interest rates for the first time since rates were effectively cut to zero at the height of the global financial crisis," said Chris Williamson, chief economist at Markit, following the release of the data.

In the previous session the US central bank appeared to leave the door open to the possibility of a first interest rate increase arriving in September, saying: “The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labour market […].”

“Market-based measures of inflation compensation remain low; survey based measures of longer-term inflation expectations have remained stable,” it added.