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GDP Growth Expands to 3.7 Percent for Second Q2 Estimate

growth [1]The nation's real gross domestic product (GDP) exceeded expectations in the U.S. Bureau of Economic Analysis' [2] second estimate for Q2 [3] released Thursday, expanding at an annual rate of 3.7 percent—an increase from 2.3 percent growth reported in the BEA's advance estimate for Q2 last month.

Real GDP growth in Q2 is way up from a paltry 0.6 percent annual growth rate in Q1 and at 3.7 percent is now way ahead of forecasts for the remainder of 2015. But when all economic factors are considered, is the news all good?

According to the BEA, the increase in real GDP estimate for Q2 reflects positive contributions from personal consumption expenditures (PCEs), exports, state and local government spending, nonresidential fixed investment, and private inventory investment. Imports, which are subtracted in the calculation of GDP, increased in Q2, according to the BEA.

GDP chart [4]

Q2's real GDP growth is consistent with the positive news for most housing metrics as of late. Existing home sales are at pre-recession levels, and in the July 2015 pending home sales report [5] released Thursday by the National Association of Realtors (NAR [6]), pending home sales were up by 7.4 percent year-over-year. Affordability and tight inventory remain obstacles to home sales, however.

"The GDP release today is very positive but most importantly because all components of the GDP showed strong improvement," Trulia Chief Economist Selma Hepp said. "Also, the growth in all components suggest that we may be looking at a strong third quarter as well. In terms of housing, the economic improvement may actually put more pressure on affordability because we are still not seeing improvements in inventories. While job growth is generally strong, the wage growth is still lagging. We will see more wage pressures going forward which will help potential buyers’ purchasing power, but that process will be slow."

"The GDP release today is very positive but most importantly because all components of the GDP showed strong improvement."

Measuring the housing market can be tricky this time of year because of the seasonality of the market, which can vary in different parts of the country, according to Realtor.com chief economist Jonathan Smoke. But housing has benefited from since the stock market recently entering correction mode on August 21 for the first time in four years, Smoke said.

"While momentum remains strong, we are entering a slower time of year for demand," Smoke said. "However, the recent stock market correction has produced a gift to the housing market in the form of lower mortgage rates and a window of time before rates move up again."

Amid the positive news for both GDP growth and housing, the question still looms large as to whether the Fed will raise interest rates at the next Federal Open Market Committee meeting, which will be September 16 and 17. Many are speculating that the turbulent stock market activity in the last week will cause the Fed to postpone raising rates. Earlier in the week, New York Fed president Bill Dudley said [7] a September rate hike seemed "less compelling" now.

"In lieu of good economic data, the looking question is what is going to happen to interest rates," Hepp said. "I think the financial turmoil we saw over the last week is going to postpone Fed’s decision to do anything. This is good for consumers since their confidence was just shaken by the turmoil and increase in rates may further derail their decisions to enter the housing market."

GDP chart 2 [8]