The economic expansion in the second quarter picked up where it left
off late last year, led by gains in consumer spending and business
investment that indicate the U.S. slump at the start of 2014 was an
anomaly. Gross domestic product rose at a 4 percent annualized rate from April through June, exceeding the median forecast of economists surveyed by Bloomberg, after shrinking 2.1 percent in the first quarter, Commerce Department figures showed today in Washington. The increase matched the average growth rate from July through December of 2013 that marked the strongest six months in a decade.
“The economy is looking pretty darned good,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh, the only economist in the Bloomberg survey to accurately forecast the gain in GDP. “The momentum for the second half is solid. The labor market is driving this growth, which means companies are looking for workers. The big picture looks a lot brighter and is probably more accurate” than the first-quarter reading suggested.
Americans bought durable goods such as autos and appliances at the fastest pace in almost five years, explaining why Whirlpool Corp. is among manufacturers becoming more optimistic that sales will keep improving. The pickup in growth, as the expansion enters its sixth year, is among reasons Federal Reserve officials meeting today will probably continue to pare monthly asset purchases.
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Market Reaction
Stocks and Treasury securities sank as the greater-than-projected rate of growth raised concerns the Fed will move more quickly to raise interest rates next year. The Standard & Poor’s 500 Index dropped 0.2 percent to 1,966.79 at 1:03 p.m. in New York. The yield on the benchmark 10-year Treasury note, which moves inversely to prices, rose to 2.55 percent from 2.46 percent late yesterday.The median forecast of 80 economists surveyed by Bloomberg called for a 3 percent advance in second-quarter GDP. Estimates ranged from 1.9 percent to 5.2 percent. The first-quarter reading was revised up from a previously reported 2.9 percent rate of contraction.
With today’s report, the Commerce Department also issued its annual revisions, incorporating newly available data from sources including corporate tax returns and wage surveys. It showed the economy grew at a 4 percent pace on average from July through December of last year, the strongest six months since late 2003, when growth picked up after President George W. Bush declared an end to major combat operations in Iraq.
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Inventory Surge
The news wasn’t all positive as a surge in inventories added 1.7 percentage points to GDP last quarter, today’s report showed. Stockpiles were rebuilt at a $93.4 billion annualized pace after a $35.2 billion gain in the first three months of the year. That could mean companies will keep tighter control on the number of goods on hand this quarter, which could cut into economic growth.Consumer spending, which accounts for almost 70 percent of the economy, rose at a 2.5 percent pace last quarter, exceeding the 1.9 percent median forecast of economists surveyed by Bloomberg and more than twice the 1.2 percent advance in the first three months of 2014.
Purchases of durable goods, including autos, furniture and appliances and recreational vehicles, jumped at a 14 percent annualized rate, the fastest since the third quarter of 2009, when the recovery began.
Positive Outlook
Whirlpool, a Benton Harbor, Michigan-based appliance maker, is among companies expecting demand to improve the rest of this year after a weak, winter-depressed start to 2014.“Macroeconomic indicators point to a strong second half as we’re seeing the lowest unemployment rate since September 2008,” Marc Bitzer, president of Whirlpool’s North America unit, said on a July 23 earnings call. He also cited gains in housing and said “strong replacement demand will continue as consumers replace older appliances.”
Automobiles remain a bright spot for consumer spending and for factory production. Cars and light trucks sold at a 16.9 million pace in June, the fastest rate since July 2006, figures from Ward’s Automotive Group showed.
Another report today showed gains in employment are probably behind the better spending data.
Companies added 218,000 workers to payrolls in July, exceeding the average for the year and showing improving demand is bolstering the job market, data from the ADP Research Institute in Roseland, New Jersey showed. The gain this month followed a 281,000 increase in June that was the strongest since November 2012.
Confirms Employment
“The GDP report confirms the strong trend to date in the labor market,” said Laura Rosner, an economist at BNP Paribas SA in New York and a former researcher at the Federal Reserve Bank of New York. “Demand is returning. It should propel hiring.”Corporate spending on structures, equipment and intellectual property such as software increased at a 5.5 percent annualized rate after rising at a 1.6 percent pace in the prior three months.
In addition to consumer spending and business investment, growth got a boost from the biggest gain in state and local government expenditures in five years. A widening trade gap subtracted 0.6 percentage point from growth.
Excluding inventories and trade, so-called final sales to domestic purchasers climbed at a 2.8 percent rate, the biggest increase since the third quarter of 2011.
Price Pressures
Today’s report also showed price pressures picked up. A measure of inflation, which is tied to consumer spending and strips out food and energy costs, climbed at a 2 percent annualized pace compared with 1.2 percent in the prior quarter. It was the biggest gain since the first quarter of 2012. Fed officials target a 2 percent gain for total prices.Fed Chair Janet Yellen told lawmakers this month that the central bank plans to press on with record easing to combat job-market slack. Speaking in semi-annual testimony, she repeated that policy makers will probably keep interest rates low for a “considerable period” after ending monthly bond purchases, which she said may be announced at an October policy meeting.
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