[ForexNews]

Real GDP fell 1.0% in Q2 09, less than the 1.5% decline that the consensus expected, but the composition of GDP growth was similar to expectations. Importantly, we view a record decline in inventories in the quarter as setting the stage for a return to growth in H2 09. There were also benchmark revisions that indicated weaker GDP growth in 2008, along with a higher saving rate in recent years.

In Q2 09, final sales contracted only 0.2%, much less than the 4.1% decline in Q1 09. A record $141.1bn decline in inventories in the quarter subtracted 0.83pp from GDP growth. This was less of a subtraction than expected because the inventory decline in the previous quarter was revised larger; because it is the change in the change in inventories that matters for GDP growth, this meant that the inventory drag on GDP in Q2 09 was less. Consumer spending declined 1.2% in Q2 09, more than the 0.5% decline had expected but smaller than the 3.1% drop in Q4 08. The report also showed expected declines in residential (-29.3%), equipment and software (-9.0%) and structures (-8.9%) investment, that were countered by a 5.6% rise in government spending and a 1.38pp contribution from net exports.

The revisions showed a lowering of 2008 real GDP growth to 0.4% from 1.1%. The first quarter of contraction is now estimated to be Q1 08 (-0.7%), whereas it had previously been Q4 07, which is now estimated to be a 2.1% gain. The decline in Q3 08 is now estimated to be -2.7%, down from -0.5% previously. On balance, the contraction in the economy over the past few quarters is now estimated to be somewhat deeper than previous estimates implied. The personal saving rate was revised higher in recent years, for example, in 2008 it is now estimated to be 2.7% compared with 1.8% previously. In Q2 09, the saving rate rose to 5.2%, up from 4.0% in Q1 09.

The history of the core PCE price index over the past several years was revised higher, but it now shows more of a slowing recently. In Q2 09, the core PCE price index fell to 1.6% y/y, down from 1.7% in Q1 09 (previously 1.8%).