Bernanke is the name of the game: GDP suggests taper is on track - Image credit: Getty Images via @daylife  The U.S. economy continues to muddle along, failing to gain momentum in the face of fiscal drag caused by Washington’s sequester. The Bureau of Economic Analysis released its first second quarter GDP estimate on Wednesday, showing real output expanded 1.7%, substantially above estimates. Yet downward revisions to the past four quarters suggest underlying trend growth hasn’t picked up at all. The silver lining: demand, which pushed up imports and supported consumption spending. In terms of what this means to Fed Chairman Ben Bernanke, it suggests he will move forward with plans to taper quantitative easing (QE) before the end of the year.  The 1.7% expansion in real GDP in the second quarter represents an acceleration over the first three months of the year, when output grew 1.1% according to the latest downward revision (from 1.8% previously). Furthermore, the fourth quarter of 2012 saw practically no gains in output (with GDP revised down to 0.1% from 0.4%), and Q# gains were marked down to 2.8%, from 3.1% previously.  The clear problem here is the sequester. With Washington continue to fight over the future state of fiscal policy, negative contributions from government spending, and higher taxes, act as a drag on growth. Indeed, several other factors including private inventory growth, exports, and nonresidential fixed investment added to GDP in Q2.  The fiscal drag does seem to be receding. Government spending fell 1.5% in Q2, compared to an 8.4% contraction in the first quarter and a 13.9% fall in the last three months of 2012. “While those data can be volatile, we expect fiscal drag to fade in the second half of the year,” explained Jim O’Sullivan of High Frequency Economics.  Residential investment added to GDP growth in the second quarter as the housing recovery continues. Fueled by the Fed’s ultra low interest rates, home prices have been rising across the country, as prospective homeowners and investors alike are gobbling up inventories. It wasn’t a good quarter for homebuilders, though, as Chairman Bernanke’s first indications of the possible draw down of his asset purchase program threw off shares in KB Home, Lennar Lennar, Toll Brothers Toll Brothers, and others in the sector starting around mid-May. The auto sector has been solid as well, with General Motors, Ford, and others reporting solid sales numbers in past months.  Gains from residential investment were complemented by strength in consumption and imports, signaling the resilience of consumer demand in the U.S. Facing the sequester and higher taxes, imports rose and consumption gained 1.8%, down slightly from 2.3% on a sequential basis. Inventories also surprised to the upside, rising 0.4%.  The Bureau of Economic Analysis also revised its numbers going all the way back to 1929, essentially engineering a $559.8 billion increase in GDP last year due to broader definitions. Average annual GDP growth from 1929 to last year was revised up to 3.3%, from 3.2% previously.  With the economy stuck in second gear and a labor market that appears to be tepidly improving, as ADP numbers on Wednesday showed, it seems like the Federal Reserve will stay its course. Fed Chairman Ben Bernanke spooked markets a few months ago introducing the taper, which he said should come later this year. As investors appear to have digested the beginning of expansionary monetary policy, market volatility has receded. The FOMC is set to deliver its latest policy statement later on Wednesday, which should follow recent Fed statements and indicate tapering later this year.
Gross domestic product expanded faster than expected in the second quarter, hitting 1.7%, yet output over the past four quarters was revised down as the economy hasn't gained momentum, yet the situation appears unchanged and could lead to Bernanke tapering this year.