U.S. Economy Roars Back to Life in Second Quarter

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Seth Perlman/AP
By Lucia Mutikani

WASHINGTON -- The U.S. economy rebounded sharply in the second quarter as consumers stepped up spending and businesses restocked, putting it on course to close out the year on solid footing.

Gross domestic product expanded at a 4 percent annual rate after shrinking at a revised 2.1 percent pace in the first quarter, the Commerce Department said Wednesday.

Previously, the government had said the economy contracted at a 2.9 percent rate at the start of the year. The second quarter's expansion was much stronger than the 3 percent economists had expected and bolstered the outlook for the remainder of the year.

"The economy came back and even though there may have been a little extra inventory building ... solid activity was so widespread that you cannot call this number an aberration," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

Despite the pickup, growth in the first half of the year badly lagged the economy's estimated 2 percent to 2.5 percent potential, a reminder that the nation's recovery from the worst recession since the 1930s remains the slowest on record.

A separate report showed private employers added 218,000 jobs to their payrolls this month, a decline from June's hefty gain of 281,000. Still, hiring remains solid and consistent with expectations for a stronger second half of the year.

U.S. stocks initially rose on the growth data before faltering, while the dollar hit a 10-month high against a basket of currencies.

Prices for U.S. Treasury debt fell, with the yield on the two-year note touching its highest level since 2011 as traders speculated about an early interest rate increase from the Federal Reserve.

Eyes on the Fed

The GDP data was released only hours before Fed officials were to end a two-day policy meeting.

The U.S. central bank is expected to announce further reductions to the amount of money it is injecting into the economy through monthly bond purchases, but it is not expected to raise rates until June of next year.

"We do not feel the report calls for pulling forward the Fed rate hike. The first quarter's bad weather didn't change the story, but simply delayed when that train gets to the station," said Tim Hopper, chief economist at TIAA-CREF in New York.

The government also published revisions to prior GDP data going back to 1999, which showed the economy performing much stronger in the second half of 2013 and for that year as a whole than previously reported.

The economy in the second quarter was buoyed by consumer spending and a swing in business inventories.

Consumer spending growth, which accounts for more than two-thirds of U.S. economic activity, accelerated at a 2.5 percent pace, as Americans bought long-lasting manufactured goods, mostly automobiles, and spent a bit more on services.

It had braked to a 1.2 percent pace in the first quarter because of weak healthcare spending.

Despite the pick-up in consumer spending, Americans saved more in the second quarter. The saving rate increased to 5.3 percent from 4.9 percent in the first quarter as incomes rose, which bodes well for future spending.

Inventories contributed 1.66 percentage points to GDP growth after chopping off 1.16 points in the first quarter.

The economy also received a boost from business investment, government spending and investment in home building.

Trade, however, was a drag for a second consecutive quarter as some of the increase in domestic demand was met by a surge in imports. Domestic demand rose at its fastest since the third quarter of 2011.

Solid domestic demand, which underscores the economy's firming fundamentals, led to some pick-up in price pressures in the second quarter, a welcome development for Fed officials who have long worried about inflation being too low.

A price index in the report rose at a 2.3 percent rate in the second quarter, the quickest in three years, after advancing at a 1.4 percent pace in the prior period.

A core price measure that strips out food and energy costs increased at a 2 percent pace, the fastest since the first quarter of 2012.

The Fed targets 2 percent inflation.

"The inflation picture should lend support to the Fed hawks who want to hike interest rates sooner rather than later," said Sung Won Sohn, an economics professor at California State University Channel Islands in Camarillo.

-Additional reporting by Richard Leong in New York.

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9 Numbers That'll Tell You How the Economy's Really Doing
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U.S. Economy Roars Back to Life in Second Quarter
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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