US economy rebounds with 4% growth recorded in second quarter

The US 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 per cent annual rate after shrinking at a revised 2.1 per cent pace in the first quarter, the US Commerce Department said today.

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 per cent 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 per cent to 2.5 per cent 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. US stocks initially rose on the growth data before faltering, while the dollar hit a 10-month high against a basket of currencies. Prices for US 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.

The GDP data was released only hours before Fed officials were to end a two-day policy meeting. The US 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 US economic activity, accelerated at a 2.5 per cent pace, as Americans bought long-lasting manufactured goods, mostly automobiles, and spent a bit more on services. It had braked to a 1.2 per cent 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 per cent from 4.9 per cent in the first quarter as incomes rose, which bodes well for future spending.

Reuters