Crescenzi: Second-Quarter GDP Surprises

The U.S. economy expanded more quickly than expected in the second quarter, growing at a 3.3% pace instead of the 1.9% pace projected in the advance estimate for the quarter released a month ago. Forecasters expected a reading of 2.7%.

The bulk of the surprise was in the inventory data, which subtracted 1.4 percentage points from the headline figure (GDP would otherwise have grown at a 4.7% pace, if not for a drop in inventory investment), instead of the 1.9 percentage points reported in the advance estimate. Obviously, with inventories down and not up during the quarter, the upward revision to inventory investment poses no problems for the economy.

A second factor in the upward revision was a sharp upward revision to net exports, which added 3.1 percentage points to GDP instead of the 2.4% reported in the advance estimate. The increase was roughly as expected. The enormous gain was the most since 1980 and the fourth largest of the past 50 years.

Concerns have developed over whether the economic lifeline that net exports have provided will end as a result of the dollar's recent rally, but it is worth remembering a few things.

First, any impact from the dollar will take time; there are often long lags between changes in currency values and trade activity.

Second, by helping to lower commodity prices, the dollar's rally will help revive global economic activity and, hence, limit weakening of U.S. exports -- the restoration of purchasing power is not just a U.S. phenomenon.

Third, even with the recent rally, the Fed's trade-weighted dollar index is 34% below where it was when it began its long slide in January 2002, which means that U.S. goods are attractively priced compared to nations abroad.

Investors will be pleased that the underlying strength of the economy was better than previously thought, but attentions are focused on the dark period ahead for the economy, which is likely to grow substantially less in the quarter ahead. This is a widely known notion, however, which means that it is already largely priced in.