US GDP Quick Analysis: Investment contraction may down the dollar

Headlines do not always tell the full story – and that is the story in today's US Gross Domestic Product report. The revised data for the second quarter has shown that the economy grew by 2.0% in the second quarter – a minor downgrade from 2.1% originally reported – but exactly as expected. 

This is well within the "new normal" rate of growth – but looking under the hood reveals some issues.

The US consumer has borne the brunt of growth – 4.7% annualized against 4.3% in the initial read. Moreover, consumption has contributed 3.1% to overall growth. 

On the other hand, home investment fell by 2.9% according to the new figures – almost double the initial release of 1.5%. Business investment fell by 0.6% – as originally reported – but confirming the first contraction since 2016.

Both components of investment dragged growth down by 1.1%, while other components such as trade and government spending balanced each other.

Fed set for looser monetary policy

The Federal Reserve convenes in three weeks and markets expect it to cut rates once again – and the case is stronger now. The Fed's horizon is the medium term – the next year to three years – and investment decisions taken now have an impact on the economy then. Despite upbeat consumption, high employment, and rising wages now – the future looks uncertain.

As mentioned earlier, business investment contracted for the first time since 2016. Back then, the central bank planned to raise rates four times but settled for one hike at the back end of the year. Weak investment numbers contributed to the Fed's hesitance back then – and may push the Washington-based institution to looser monetary policy in 2019 as well.

Markets have shrugged off the news due to the "as-expected" headline and the focus on trade headlines. However, the greenback has room to the downside.

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