News that US second quarter growth was revised up to 4.6% was welcome news for US dollar bulls, as it showed that the US economy bounced back strongly from the shock 2.1% contraction of the first quarter. The second quarter featured the best growth of the past 10 quarters, while several one-off factors seemed to have depressed growth during the beginning of the year.
The revision from 4.2% to 4.6% was in line with economists’ consensus expectation. The good news was that the revision came in real final sales, i.e. excluding the inventory buildup that could reverse itself during the next quarters. Real final sales came in at a +3.2% annualized quarter-on-quarter growth rate compared to the 2.8% initially estimated.
Furthermore, the component of real final sales that did really better was business investment – both on equipment (+11.2%) as well as nonresidential structures (+12.6%). Spending by the consumer was not revised at +2.5%, as a strong labor market is helping consumption at a moderate pace.
The pickup in investment and capital expenditure is a particularly encouraging sign as it shows that at last businesses could start to feel that the economic expansion is sustainable and are therefore willing to invest in things other than their own shares. Corporate profits also grew at their fastest rate in almost 4 years at +8.4%, which could result in earnings re-investment.
Based on the latest GDP numbers, the overall economy could grow around the 3% pace in the coming quarters, which represents good performance. A sustainable economic recovery could help the Federal Reserve to raise interest rates closer to normal levels without the fear that the US economy would slow down sharply as a result. The economic performance of the United States contrasts sharply with conditions in the Eurozone and Japan, where slowing economies could warrant additional monetary accommodation. The prospect for monetary policy divergences has been a key factor in driving the US dollar to multi-year highs and this trend has not shown signs of exhaustion yet.
In the immediate aftermath of the release, euro / dollar dropped from around 1.2735 to 1.2715, while in subsequent trading the euro dipped below 1.27 – a 14 month low. The dollar was also strong against other currencies such as the Japanese yen.