News Releases

CHICAGO, IL--(Marketwired - Jul 31, 2013) - BMO Capital Markets

• Consumer spending slows
• Business investment turns up
• Residential construction surges
• Personal income and savings rise

The U.S. economy grew modestly in the second quarter because of hefty fiscal restraint, but growth exceeded expectations and looks to turn convincingly higher in the second half of the year, according to BMO Economics.

U.S. real GDP rose 1.7 percent annualized in the second quarter of 2013. According to Sal Guatieri, Senior Economist at BMO Capital Markets, "This is from downwardly-revised gains of 1.1 percent in the first quarter of the year, no thanks to tax hikes and defense cuts, and 0.1 percent in the fourth quarter of 2012 due to Hurricane Sandy and defense cuts." Sequestration chopped federal nondefense spending 3.2 percent annualized in the quarter, and civic worker furloughs slowed consumer spending to 1.8 percent, despite motor vehicle sales hitting five-year highs. Imports surged 9.5 percent, stripping 1.5 percentage points from GDP growth.

Positive results from the report include:

• Residential construction clocked in with a fourth consecutive double-digit gain
• Exports bounced back strongly
• State and local government expenditure rose for the first time in a ye ar.
• Business appeared less concerned about the knock-on effects of sequestration, as nonresidential investment rebounded 4.6 percent.
• Commercial construction rose for the eighth time in nine quarters
• Equipment spending jumped 4.1 percent
• Intellectual property (the new category which includes computer software, R&D and entertainment, literary and artistic originals) rose a decent 3.8 percent to extend a three-year upward trend.
• Personal income rebounded 4.1 percent annualized in the second quarter on firmer job growth. The personal saving rate was revised sharply higher in the first quarter (to 4.0 percent from 2.5 percent previously), and rose further to 4.5 percent in the second quarter, suggesting households have some wherewithal to spend going forward.

While growth in the previous three quarters was revised lower, the 2012 annual rate was raised to 2.8 percent from 2.2 percent due to an upward revision to growth early in the year. Said Guatieri, "This will likely weigh toward a weaker 2013 annual result. The economy grew only 1.4 percent in the past year, though the recovery since the recession ended in mid-2009 was revised slightly higher."

"The strength in business investment provides some optimism that growth will pick up to a 3 percent or better pace in the second half of the year, though sequestration will remain a force in the third quarter," said Guatieri. "Key July figures due out in coming days will suggest whether growth is poised to rebound. Earlier this morning, ADP employment topped expectations with a 200,000 gain in private-sector jobs in July. This suggests some modest upside risk to Friday's payrolls report, where an expected 175,000 new jobs should reduce the unemployment rate to 7.5 percent."

Guatieri stated that today's report should not affect the outcome of the Fed's policy meeting, where offi cial rates and the pace of asset purchases are expected to remain steady, though the statement will likely adopt a dovish tone.