Second-Quarter GDP Growth Revised Sharply Higher to 3.7%

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M. Spencer Green/APA Ford Motor Co. employee works on the engine assembly of a 2016 Ford Explorer at the Chicago Assembly Plant in Chicago.
By Lucia Mutikani

WASHINGTON -- The U.S. economy grew faster than initially thought in the second quarter on solid domestic demand, showing fairly strong momentum that could still allow the Federal Reserve to hike interest rates this year.

Gross domestic product expanded at a 3.7 percent annual pace instead of the 2.3 percent rate reported last month, the Commerce Department said Thursday in its second GDP estimate for the April-June period.

%VIRTUAL-pullquote-The U.S. economy entered the current market turbulence with momentum, which will help it to shrug off the drag from China and other developing economies.%The GDP report, which was released in the wake of a global stock market sell-off, should assure investors and cautious Fed officials that the United States is in good shape to weather the growing strains in the world economy.

"The U.S. economy entered the current market turbulence with momentum, which will help it to shrug off the drag from China and other developing economies," said Diane Swonk, chief economist at Mesirow Financial in Chicago.

Concerns over slowing economic growth in China sent global equity markets into a tailspin last week, raising doubts that the U.S. central bank would raise its short-term interest rate next month. Markets have since recouped some of the huge losses.

On Wednesday, New York Fed President William Dudley said that prospects of a September lift-off in the central bank's key lending rate "seems less compelling to me than it was a few weeks ago."

U.S. stocks rose sharply on the GDP data, a day after posting their biggest one-day gain in four years. Prices for U.S. government debt fell, while the dollar firmed against a basket of currencies.

"The Fed could certainly hold off until later this year, citing the recent market turmoil, but the economic fundamentals would also justify a small September rate increase," said Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh.

The upward revisions to second-quarter GDP growth also reflected the accumulation of $121.1 billion worth of inventories, $11.1 billion more than previously estimated. That meant inventories contributed 0.22 percentage point to GDP instead of subtracting 0.08 percentage point as reported last month.

While the huge inventory build will likely weigh on growth in the third quarter, the blow could be softened by rebounding business investment in capital goods.

Economists had expected that second-quarter GDP growth would be revised to a 3.2 percent rate. The economy grew at a 0.6 percent rate in the first quarter. Output expanded 2.2 percent in the first half of the year compared to growth of 1.9 percent during the same period in 2014.

Strong Domestic Demand

Underscoring the solid economic fundamentals, a measure of private domestic demand that excludes trade, inventories and government expenditures rose at a 3.3 percent rate in the second quarter, instead of the previously reported 2.5 percent pace.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 3.1 percent rate, rather than the 2.9 percent pace reported last month. Consumer spending got off a to brisk start in the third quarter, with retail sales rising solidly in July.

A strong labor market, cheaper gasoline and relatively higher house prices are boosting household wealth, helping to support consumer spending.

The employment picture was further brightened Thursday by a separate report from the Labor Department showing initial claims for state unemployment benefits slipped 6,000 to a seasonally adjusted 271,000 for the week ended Aug. 22.

It was the 25th straight week that claims remained below the 300,000 threshold, which is usually associated with a strengthening labor market.

Economists also said they expected the recent stock market rout to have only a limited impact on the economy.

"As long as this is a garden-variety correction, the impact on the U.S. economy should be modest," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

The Commerce Department said investment in nonresidential structures was revised to show an increase rather than a contraction, reflecting stronger spending on commercial and health care construction.

Spending on residential construction, which includes brokers' commissions, was raised. More gains are likely this quarter after a third report Thursday showed an increase in contracts to purchase previously owned homes in July.

In the second quarter, business spending on equipment wasn't as weak as initially thought.

The energy sector continued to weigh on growth as it struggles with the lingering effects of deep spending cuts by oil-field companies like Schlumberger (SLM) and Halliburton (HAL) in the aftermath of a more than 60 percent plunge in crude oil prices in the past year.

Spending on mining exploration, wells and shafts plunged at a 68.3 percent rate in the second quarter, the largest decline since the second quarter of 1986.

The trade deficit was smaller than previously reported, adding 0.23 percentage point to GDP growth.

The GDP report also showed a rebound in after-tax corporate profits, but a strong dollar and lower oil prices remain a constraint.

9 Numbers That'll Tell You How the Economy's Really Doing
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Second-Quarter GDP Growth Revised Sharply Higher to 3.7%
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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