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“The assessment of the economy in June’s FOMC statement already took into account the strong momentum in Q2,” Rabobank analysts note. “According to the statement economic activity had been rising at a ‘solid rate’.”

Key quotes

“Today’s GDP release confirmed this with 4.1% growth in Q2, an ‘amazing rate’ according to President Trump. Personal consumption was strong at 4.0%, reflecting underlying momentum due to a strong labor market and tax cuts. Business investment remained strong due to the high oil  price (shale oil and gas) and stimulated by tax cuts and deregulation. In contrast, the boost to net exports is less likely to last, because they may have risen in anticipation of tariffs.”

“That should reverse in Q3. Note that net exports contributed 1.1 ppt to GDP growth in Q2, otherwise GDP growth would have been 3.0%. That is still a strong number nevertheless, confirming that momentum in the US economy is solid. What’s more, inventory depletion subtracted 1.0 ppt from GDP growth in Q2. Downward pressure on inventories could continue into Q3 if consumer demand stays strong and tariffs hamper restocking by importers. However, the front-running of tariffs in Q2 by exporters will end and that should mitigate some of the negative inventory effects in Q3.”

“The GDP report is providing more ammunition for the hawks in the FOMC and this could shift the delicate 8-7 balance of the dot plot in favor of 4 instead of 3 hikes this year. However, we will have to wait until the September meeting for an update of the FOMC projections.”