US GDP revisions see massive boost to 2.5 per cent

US second quarter GDP has been revised up from 1.7 per cent on an annualised basis to a massive 2.5 per cent. Economists had been forecasting revisions to 2.2 per cent.

Positive momentum came from a smaller trade gap and more inventories.

The good news is confusing equities investors, who don't want the economy to pick up to much, for fear of subsequent monetary tightening.

Paul Ashworth, chief US economist, Capital Economics:

The upward revision to second-quarter US GDP growth should give Fed officials more confidence that the recovery is gathering steam as the fiscal drag begins to fade. Under those circumstances, we still think the Fed will begin tapering its monthly asset purchases in September.

That said, it's no certainty and August's non-farm payroll figures will be watched closely. The upward revision to GDP growth was principally because net external trade ended up making a neutral contribution, whereas the initial estimate assumed it subtracted 0.8% from overall growth.

We currently expect third-quarter GDP growth to come in around 2.5% as well, with the potential for a slight acceleration in the fourth quarter. The latter, however, assumes that the looming fight over the debt ceiling doesn't trigger a prolonged Federal shutdown.