U.S. Second Quarter GDP Grew a Mere 1.5%, Beating Expectations

Second quarter U.S. GDP grew a mere 1.5 percent, faster than expectations of a 1.4 percent rate of growth and well above the "whisper number" which was much closer to 0 percent. The report dashed hopes of imminent Federal Reserve easing, as it shows that the U.S. economy continues to chug along near stall speed.

The Bureau of Economic Analysis noted that, "The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and residential fixed investment that were partly offset by a negative contribution from state and local government spending." However, the BEA noted that all of these components that added to growth showed slower gains in the second quarter than in the first. These components were largely responsible for the slowdown from the 2.2 percent annual rate of growth in the first quarter to the 1.5 percent rate in the second quarter.

U.S. equity futures jumped on the news, as the report beat expectations and quelled fears of an imminent double-dip recession. Even though it is a positive relative to expectations, it is still a sour number as sub-2 percent growth, below the dreaded stall speed, will not be enough to restore the U.S. economy to full employment. Dollar strength was also seen after the report as investors' hopes of QE3 were lowered. Inflation expectations still remain high for the Fed to act, and this report does nothing to quell those expectations. Growth would need to slow further for inflation to slow and for the Fed to have room to act.

Investors now await the Fed's decision next week on further policy action as well as the monthly Non-Farm Payrolls report. Continued weakness in employment could prompt the Fed to act, however the warm weather in the early months of this year could have pulled forward employment growth and is thus making current data appear artificially weak. The Fed may continue to wait and see until the fiscal cliff is resolved and if these seasonal factors eventually smooth out.