Economy Rebounded Strongly in 2Q Following Dismal Winter

Economy GDP
Lenny Ignelzi/AP
By Lucia Mutikani

WASHINGTON -- The U.S. economy rebounded more strongly than initially thought in the second quarter with a bigger chunk of the growth driven by domestic demand in a bright sign for the future.

Gross domestic product expanded at a 4.2 percent annual rate instead of the previously reported 4 percent pace, the Commerce Department said Thursday.

Both business spending and exports were revised higher, while a buildup in business inventories was smaller than previously estimated -- a mix of growth that provides a stronger underpinning for the remainder of the year.

%VIRTUAL-pullquote-The economy is in good shape and getting better.%Separate reports showing a second straight weekly decline in the number of Americans filing new claims for jobless benefits and a jump in home purchase contracts also suggested underlying momentum in the economy.

"The economy is in good shape and getting better," said Joel Naroff, chief economist at Naroff Economic Advisers in Holland, Pennsylvania.

While the economy shrank at a 2.1 percent rate in the first quarter, economists expect growth of around 2 percent for the year as a whole, with GDP expanding about 3 percent in 2015.

The dollar firmed against a basket of currencies on the data, but U.S. stocks were down as traders kept a wary eye on Ukraine, which accused Russian forces of entering the country. Prices for U.S. Treasury debt rose as the troubles in Ukraine triggered flight-to-safety bids.

One report Thursday showed the number of Americans filing new applications for jobless benefits slipped 1,000 to a seasonally adjusted 298,000 last week.

In a third report, the National Association of Realtors said its pending home sales index, which leads home resales by a month or two, jumped 3.3 percent to an 11-month high in July. It was the latest sign the housing market recovery was back on track after faltering in the second half of 2013.

Growth in the second quarter was broad-based, with consumer and business spending, exports, homebuilding and even government contributing. Domestic demand rose at its fastest pace in four years, pointing to a recovery that was becoming more durable after the first-quarter's weather-induced slump.

Still, the data was unlikely to lead the Federal Reserve to bring forward the timing of interest rates hikes as slack still exists in the labor market and inflation will likely remain below the U.S. central bank's 2 percent target.

"We still have a long way to go. Hence, the Fed remains cautious about how rapidly it will raise rates when they start," said Diane Swonk, chief economist at Mesirow Financial in Chicago.

Economists had expected the second-quarter GDP growth pace would be revised down to 3.9 percent.

Rising Income

Gross domestic income, which measures the income side of the growth ledger, surged at a 4.7 percent rate, consistent with strong job gains during the quarter. That was the fastest increase since the first quarter of 2012.

While first-quarter growth in household disposable income was revised down, the second quarter estimate was more robust than previously reported -- a good omen for future spending.

At the same time, after-tax corporate profits rebounded from a decline to hit a three-year high, and business spending on equipment and nonresidential structures, such as gas drilling, was revised sharply higher.

The amount of stock accumulated by businesses was a bit less than initially reported, reducing the estimated contribution of inventories to GDP growth to 1.39 percentage points from 1.66 percentage points.

The relatively smaller inventory build means less stock overhang, which bodes well for third-quarter GDP growth.

While trade was a drag for a second consecutive quarter, export growth was raised to its fastest pace since the fourth quarter of 2010.

9 Numbers That'll Tell You How the Economy's Really Doing
See Gallery
Economy Rebounded Strongly in 2Q Following Dismal Winter
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.
Read Full Story