US real GDP in 2Q '05 grew 3.4% (AR) versus the Consensus expectation for 3.5% growth. Revisions to data from 2002 to 2004 lowered growth to an average 2.8% during the period from 3.1% estimated earlier.

Growth in domestic demand continued firm last quarter at a 4.0% annual rate. The acceleration versus 1Q owed to faster growth in business fixed investment at 9.0% (AR, 9.2% y/y) which occurred because of 40.8% (AR) growth in transportation. Real PCE grew 3.3% (3.9% y/y), down slightly from last year's pace, and residential building grew a solid 9.8% (5.9% y/y).

Slower production growth occurred as inventories were drawn down for the first quarter in two years and lowered GDP growth by 2.3 percentage points. It was the third subtraction from GDP growth due to inventories in the last four quarters but it was the largest subtraction since 2000.

A smaller foreign trade deficit contributed 1.6% percentage points to growth last quarter as exports surged 12.6% (8.1% y/y) and easily outpaced imports which declined across categories; by 2.0% (5.2 y/y) in total.

The chain price index grew 2.4%, the slowest rate of growth since 3Q04. The slowdown was the result of foreign trade. The chain price index for domestic final demand grew 3.2% (2.8% y/y), up from 2.9% growth last year.

Happy-Hour Economics, or How an Increase in Demand Can Produce a Decrease in Price from the Federal Reserve Bank of Atlanta can be found here.