US Economy Contracts in Q2 but Recovery Beckons

The US economy suffered continued economic contraction during the 2nd quarter, (April to June), though the gap to growth narrowed, relative to Q1. The fall in output of -1% annualised compared to a consensus forecast of -1.5%. Q1 GDP was revised downwards from -5.5% to -6.4%. 2008 growth was also revised to a weaker 0.4% from 1.1%.

The world’s largest economy has now shrunk for four consecutive quarters, the longest losing sequence since records were formalised in 1947.

A key contributor to the latest decline was the erosion of business inventories which slumped by a record $140bn in the quarter as firms cut production in an effort to reduce stockpiles. The production cut-backs contributed about 80% of the Q2 contraction in economic activity.

Exports, residential and business investment all fell though the rate of decline in each sector slowed compared to the 1st quarter.

The GDP report came at the end of another week of appreciating equity prices, though as predicted in this column last week Monday and Tuesday saw equity markets stutter giving short sellers a small window of opportunity mid-session to prosper before equities resumed their bullish run later in the week.