This morning’s announcement that U.S. real GDP came in lower than expected in the second quarter — up just 0.7% — may see interest rates fall further in response.

Headline GDP rose 0.7%, with exports and capital spending in very steep declines. Structures investment fell at an 11.2% rate, buying of equipment and software plunged at a 14.5% pace, and exports of goods tumbled at a 13.7% rate. “All these figures ring true — the global capital spending slowdown has its epicentre in the United States,” says BMO Nesbitt Burns.

CIBC World Markets says that, “The mix of winners and losers turned a lot less favourable. In the first quarter, the finger of blame could be pointed at what, to the optimists, appeared to be a temporary inventory adjustment. But an outright collapse in business capital spending and exports cut Q2 final sales to only 0.7%, and it took a continued public sector spending spree to stay even that far above zero.”

“Interest rate cuts are still working, but the two weakest sectors, business investment and exports, will be immune to their impact. Plunging profits and an overhang of excess capacity, particularly in IT equipment, look to keep capital spending in decline for at least another quarter, with little hope for a sharp upturn any time soon,” says CIBC. “The best the Fed can do at this point is to sustain consumer spending, which was still advancing at a moderate 2.1% pace in Q2, and housing, up a solid 7.4%.”

To that end, it sees further rate cuts in the U.S. “These data are certainly weak enough to put the Fed onside for a quarter point cut in August, particularly since durable goods orders suggest no end in sight to the capital spending drought. We expect one further insurance move beyond that, although the Fed might skip a meeting in order to watch for the impact of ongoing tax rebate cheques.”

BMO agrees, noting, “The outlook remains unchanged in our view — very slow growth, with substantial downside risk for the second half of the year. There was plenty of support for easing monetary policy in the GDP details.”