GDP Beats Forecast On Upturn In State And Local Spending

The first estimate of second quarter GDP was released Wednesday morning alongside massive revisions to previous years data that now account for certain forms of research and development spending.

However, data for the second quarter beat economists expectations sending S&P 500 futures into a volatile trading pattern while gold dropped sharply.

1.7% Growth

For the second quarter of 2013, the Bureau of Economic Analysis estimated that the economy grew 1.7 percent, much better than the consensus forecast for 1.0 percent growth. However, the first quarter's growth rate was revised lower to 1.1 percent from 1.8 percent, muting the 0.7 percent beat in the second quarter by revising downward the first by the same amount.

"The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and residential investment," noted the BEA. "The acceleration in real GDP in the second quarter primarily reflected upturns in nonresidential fixed investment and in exports, a smaller decrease in federal government spending, and an upturn in state and local government spending."

Cool Inflation

In the report, the BEA also noted that inflation remained subdued in the second quarter. The PCE measure of inflation, a favorite of Ben Bernanke and the Federal Reserve as a whole, and slower than forecast inflation could mean that the Fed keeps it easy-money policy for longer than previously thought.

In the second quarter, the PCE Deflator rose a mere 0.7 percent compared to the 1.0 percent estimate, a decline of 0.6 percent from the first quarter's 1.3 percent rate of inflation. The rate of inflation is below the Fed's projected range of 0.8-1.2 percent PCE inflation for 2013.

Markets Volatile

S&P 500 futures initially declined on the news but rebounded sharply in the aftermath of the data release. S&P 500 futures fell as far as 1,681.50 before rebounding and trading back to 1,685.25, nearly flat from before the release. The yield on the 10-year Treasury yield rose 7 basis points to 2.69 percent on fears that stronger growth would lead to earlier tapering from the Fed.

Gold futures initially spiked as low as $1,321.00 before bouncing back to $1,322.20. Meanwhile, the Dollar Index spiked on the news, rising 0.31 percent to 82.083 on strength against the pound, the Swiss franc, the euro, and the yen.

BY Matthew Kanterman