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By Jason Stipp and Robert Johnson, CFA | 07-31-2013 11:30 AM

What's Behind the GDP Surprise

A smaller headwind from government and business investment growth drove better-than-expected GDP growth in the second quarter, but Morningstar's Bob Johnson is sticking with his full-year outlook.

Jason Stipp: I'm Jason Stipp for Morningstar. We got the first read on second-quarter GDP Wednesday. It showed that the U.S. economy grew by 1.7% in that second quarter. This was much higher than almost anyone expected, including Morningstar's Bob Johnson, our director of economic analysis. He's here to give his take on the report.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: The number was a lot better than you expected. You were actually really worried about this report, that it could even be negative. What's your take on this 1.7%?

Johnson: The 1.7% was a lot better than I hoped for. There were a few special factors in the number that made it come in better than I thought it would, but overall it was a better number.

Stipp: Two of the big things that varied from what you thought might happen in the second-quarter GDP was government, first of all. So government didn't help us, but it didn't hurt us nearly as badly as it did before?

Johnson: If you had to pick two things that I really blew in the forecast, certainly one was government, and I was a little worried. Defense spending is always very volatile and makes that number swing. Government took off 0.9% in the first quarter, only 0.4% in the second quarter, and almost all of that improvement was on the defense side, which is very volatile. I did see orders make an unusual spike in the last orders report, so I was a little worried about [my forecast], and indeed government was a big reason that we did better than I thought, and it was the federal government, [and specifically] defense spending. I don't think we're quite over the hill on that one yet.

And the other big thing was business investment spending that I really blew it on. There my methodology probably failed me a little bit. I looked at a lot of year-over-year data suggesting that the business investment spending on structures was off and had been on a four-month downtrend. However, sequentially we had bit of an accident, a bad number in the first quarter that really threw that number down. So that made the comparison very easy in the second quarter. So business investment spending actually didn't make a huge improvement. It was probably a 1% or so swing in that number between the first quarter and the second quarter, and that's one thing that I got wrong.

Stipp: One of the [components] where you were pretty close is the most important component, and that's consumer. You thought we would see about 1.5%; it came in at 1.8%. What's your sense of the consumer strength after you see that number?

Johnson: And that's quarter-to-quarter growth in numbers, not contribution. The contribution would have been in the 1.2% range. But the consumption number really came in about where we thought it would, and that's the key driver; its 70% of the economy. I would say services were probably just a little bit heftier than I thought. That would explain the small difference that we saw, but that number was certainly within the realm of what everybody had thought.

Stipp: Housing is, obviously, one area that everyone is talking about, but it doesn't necessarily have a huge impact on this report.

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