TD Economics

July 30, 2010

Data Release: Q2 data confirms a half-hearted consumer

• Real GDP for Q2 came in at 2.4% (annualized), which was near expectations of 2.6%. However, the real story
was in the annual revisions. Although Q1-2010 was revised up a full percentage point to 3.7%, this was because
the level of GDP had dropped for the prior quarters on downward revisions that resulted in a slightly deeper
recession, with a peak-to-trough of -4.1% (instead of -3.8%)

• Let’s start with the Q2 data. Much of the strength came from the investment category, as equipment and software
rose by 22%. Residential investment also posted a robust gain of 28%. Personal consumption rose on the
quarter, but at a rather tepid 1.6% pace. Meanwhile, there was a large accumulation in inventories that added
one percentage point to the headline GDP growth figure. Although exports rose by a robust 10.3%, the gain was
trumped by a massive 28.8% gain in imports, with the net effect shaving 2.8 percentage points from GDP.

• On the back revisions to the annual data, real personal consumption bore the brunt of the downward adjustment,
with a peak-trough now of -2.4% compared to -1.9% prior.

Key Implications

• There are two elements to today’s GDP report. The first is the figures specifically for the second quarter, which
supports the notion that a mid-cycle slowdown is well entrenched. The US will not have a traditional period of
pent-up consumer demand-driven growth. Real consumer spending has held below 2% growth in each of the
past three quarters, when traditionally we would expect to see it in the 3-5% range. We expect consumer
spending to lumber along in a 1-2.5% range over the quarters to come.

• Although domestic demand was strong at 5.1% in the second quarter, much of that stemmed from business
investment. The large accumulation in inventories alongside tepid consumer spending also makes us suspect
that some of the inventory swing was unintended, and thus there will be pay-back to production and investment in
the coming quarter.

• The second element to today’s report came in the form of the revisions to the historical data which showed that a
slightly deeper recession, which was more heavily embedded in consumer spending. These revisions help
explain a few head scratchers that have irritated economists in recent months, but still don’t fully resolve them.
First, the deeper recession will temper some of the unusually strong productivity gains that were reported over the
recession. Second, that deeper recession also provides a little more rationale for the large degree of job losses
that materialized over the period. Third, the resulting larger amount of economic slack provides a little more
support for the persistently low rate of core inflation (with pressures still on the downside), as the recovery gets
increasingly long in the tooth.

Beata Caranci, Associate Vice President and Deputy Chief Economist

416-982-8067

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