Upward Revision to U.S. Q2 GDP Due to Exports and Tax Rebates

The strong upward revision to second quarter U.S. GDP was the result of strong exports and the fiscal stimulus package, according to economists who are already looking forward to GDP results from the third quarter.

Second-quarter U.S. GDP rose above expectations in the preliminary report, rising to 3.3% from the previously reported 1.9%, the Bureau of Economic Analysis reported on Thursday. Economists were expecting a revision to 2.7%.

"Overall, this was a fairly strong report and suggests that the fiscal-stimulus driven consumption spending and weak dollar added significant momentum to U.S. economic activity in Q2," wrote Millan Mulraine, economics strategist at TD Securities. "However, with the dollar strengthening in the past few months and the tax-rebate cheques spent, economic activity is expected to moderate significantly in the coming quarters."

Exports advanced by 13.2% in the revision, up from the originally posted 9.2% gain, while imports were revised to a decline of 7.6%, from the previously reported 6.6% decline.

T.J. Marta, fixed income strategist at RBC Capital Markets, said he expects this GDP growth to have hit a temporary peak. "The domestic picture continues to look a bit soggy, but the lift to growth from net exports is very welcome," Marta wrote. "We believe that this print could mark the highwater mark for 2008 GDP growth, as the tax rebate stimulus wears off and global growth cools."

The other contribution to the improvement to GDP growth revision was the drop in inventories. Inventories fell by $49.4 billion in the revised report, from the drop of $62.2 billion reported in the advance estimate.

Economists are already looking ahead to third quarter results, which will be influenced by the tax stimulus package wearing off and the higher trending U.S. dollar.

"Looking ahead, there are already some signs that the impact of the tax rebates is starting to wane going into the third quarter and expectations that it will be totally spent by Q4," wrote Paul Ferley Assistant Chief Economist at RBC. "The support to exports from the earlier depreciation of the US dollar may be more long lived though the greenback is starting to trend higher."

By Steve Stecyk and edited by Stephen Huebl