US economy expands by 1.7%

 

The US economy fared slightly better than initially thought in the second quarter, but the pace of growth remained too slow to shut the door on further monetary easing from the Federal Reserve.

Gross domestic product expanded at a 1.7 per cent annual rate, the Commerce Department said in its second estimate today as stronger export growth offset a pull-back in restocking by businesses wary of sluggish domestic demand.

That was up from last month's 1.5 per cent estimate and in line with economists' expectations. The economy grew at a 2.0 per cent pace in the January-March period.

The report also showed that after-tax corporate profits unexpectedly rose at 1.1 per cent rate after sinking 8.6 per cent in the first quarter.

While the composition of economic activity was fairly favourable, growth remains well below the 2-2.5 per cent rate required every quarter to hold the unemployment rate steady, which could compel policymakers at the US central bank to offer additional stimulus at their September 12-13th meeting.

Speculation the Fed would loosen policy further had been dampened by a pick-up in job growth and a rebound in retail sales in July, but other data on business spending and inflation supported more action.

Chairman Ben Bernanke could offer more clarity in the near-term outlook for monetary policy when he gives a speech at the Kansas City Fed's high-profile gathering in Jackson Hole, Wyoming, at the end of the week.

The jobless rate rose to 8.3 per cent in July from 8.2 per cent the prior month. The weak economy could be a stumbling block to president Barack Obama's quest for a second-term in office in November.

First-quarter economic growth was revised up to show strong export growth, despite slowing global demand. Trade contributed 0.32 percentage point to GDP growth instead of subtracting a third of a percentage point, as previously reported.

That helped to offset the drag from inventories. Business inventories increased $49.9 billion instead of $66.3 billion and subtracted 0.23 percentage point from GDP growth in the April-June period. However, the careful management of stocks can be a boost  to the economy in the third quarter.

Excluding inventories, GDP rose at a 2.0 per cent rate rather than 1.2 per cent. In the first quarter, final sales of goods and services produced in the United States increased at a 2.4 per cent pace.

There were also upward revisions to growth in consumer spending, which was bumped up to a 1.7 per cent pace from the previously reported 1.5 per cent. That was a step-down from the 2.4 per cent pace recorded in the first quarter.

Investment in the construction of nonresidential structures was stronger than previously reported. But growth in business investment in equipment and software was lowered to a 4.7 per cent pace, the slowest since the third quarter of 2009, from 7.2 per cent previously.

Spending by businesses on equipment and software has slowed sharply from a peak of 18.3 per cent in the third quarter of last year.

That appears to have intensified early this quarter, with a measure of business spending plans falling sharply in July. The pullback likely reflects worries of deep government spending cuts and higher taxes scheduled to kick in at the start of 2013, as well as troubles from the debt crisis in Europe.

Growth in spending on homebuilding was cut to an 8.9 per cent rate from 9.7 per cent. The decline in government spending was not as deep as previously reported, with defense outlays falling at a 0.1 per cent rate instead of 0.4 per cent.

Though consumer spending was revised up, inflation pressures remained muted.

A price index for personal spending rose at an unrevised 0.7 per cent, the slowest pace since the second quarter of 2010. It rose 2.5 per cent in the first quarter.

A core measure that strips out food and energy costs advanced at an unrevised 1.8 per cent pace, slowing down from 2.2 per cent in the prior quarter.

Reuters

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