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The expected upward revision in second-quarter gross domestic product came in as advertised earlier this morning, and it was an even stronger performance than many of the economic pundits had expected. To wit, after an initial estimate of a 1.7% rate of improvement in the April-to-June period was issued a month ago, the second, or preliminary, estimate of GDP growth showed a 2.5% increase. Expectations had been for growth of 2.2%. In the first quarter, by comparison, real GDP had risen by just 1.1%.

Of note, the better showing in the second quarter, which reflected more complete source data, was primarily driven by positive contributions from personal consumption expenditures, exports, private inventory investment, and residential and nonresidential fixed investment. A smaller decline in federal government spending than initially forecast was also a factor in the upward revision.

Breaking the report down, we see that personal consumption expenditures increased by 1.8%. Interestingly, the initial-quarter gain in this series was a more vigorous 2.3%. However, durable goods increased by 6.1% in the latest period; in the first quarter, the gain was a slightly more subdued 5.8%. A bigger positive swing factor, however, was provided by nonresidential fixed investment. Here, a first-quarter decline of 4.6% moved to a solid 4.4% rise in the more recently concluded three months. Also, real exports surged by 8.6% in the latest quarter; that was a notable swing from a small decrease in the opening stanza.

Importantly, real federal government consumption expenditures decreased by just 1.6% in the June period. The decline was a much more formidable 8.4% in the first quarter. A big part of the story here was a big positive swing in defense spending, going from an 11.2% drop in the first three months to a nearly flat showing in the second interim. It would appear that earlier fears of a big penalty from the celebrated sequestrations were somewhat exaggerated. 

Looking at the report in total, there was a notable improvement from the first to the second quarter. Indeed, a measurably larger one than had been forecast. Going forward, and considering the wealth of economic data issued since the end of the most recent period, our sense is that third-quarter GDP will hold in the range of 2.0%-2.5%, and then move back up to the upper end of this range during the concluding stanza.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.