Second quarter GDP better than expected – but economy still in slow gear

New GDP numbers for April through June show the economy growing by 1.7 percent – an unexpected jump. That could lead the Federal Reserve to ease up on its stimulus program.

By , Staff writer

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    Jeff Caldwell checks a vehicle on the assembly line at the Chrysler Jefferson North Assembly plant in Detroit earlier this year.The Commerce Department issued its first estimate of how fast the US economy grew in the April-June quarter on Wednesday.
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The US economy grew at a 1.7 percent annual pace in the second quarter – a welcome acceleration that many forecasters didn’t expect.

It’s a sign that businesses are investing more and consumers are spending more, despite tax hikes that took effect at the beginning of the year.

The nation’s gross domestic product, or GDP, had grown at a rate of just 1.1 percent in the first quarter and 0.1 percent in last year’s final quarter.

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The positive report from the US Commerce Department was matched Wednesday by a sign of progress in the troubled European economy as well, where the number of people unemployed fell for the first time since April 2011.

Investors responded by pushing up stock prices, with the Standard & Poor’s 500 index up about 0.5 percent for the day by the middle of the trading session.

The pickup in US growth comes despite the arrival of Congress’s budget “sequester,” which began to impose automatic spending restraint across much of the federal budget as of April. And to many forecasters, that suggests that the pace of economic expansion will pick up during the year’s second half.

For now, though, the recent progress still leaves the economy crawling forward at only a tepid pace.

Since last December, for example, the unemployment rate has edged downward by just a small degree: from 7.8 percent to 7.6 percent in the June reading. The Labor Department will release the jobless rate for July Friday.

“Four years after the Great Recession we are still stuck with a recovery only a statistician could love,” economist Mark Vitner of Wells Fargo writes in an analysis of the new numbers. “We expect growth to gradually ramp up in the second half of this year, but growth will still lag behind most previous recoveries.”

In the second quarter, consumer spending expanded at a 1.8 percent pace, and “fixed investment” by businesses grew at a 9 percent annual rate. Such investments include everything from homebuilding and new offices to new computers.

This suggests that the private sector is moving forward, after taking a hit from higher taxes that took effect in January. The changes included a rise in tax rates on high-income Americans and the expiration of temporary 2 percentage point cut in the payroll tax for Social Security.

In the euro zone nations, meanwhile, the progress on unemployment still leaves an economy that’s struggling to find its footing, as some member nations in the currency zone confront high debt levels.

The economic news coincides with a meeting of the Federal Reserve’s policy committee, which is weighing a gradual withdrawal of the unusual monetary stimulus known as “quantitative easing.” Some Fed officials want to scale back on this bond-buying program – designed to spur growth by keeping long-term interest rates low – starting as soon as September, if the economy continues to make progress.

Wednesday’s numbers from the Commerce Department also included revisions to past GDP figures, stemming in part from new estimates of the value of intellectual property.

“The revision … showed that while the contraction during the Great Recession was slightly less severe than previously reported, it remains the largest decline since quarterly data became available in 1947,” said Alan Krueger, chairman of the president’s Council of Economic Advisers, in a White House blog post.

Inflation-adjusted GDP fell by 4.3 percent during the recession, cumulatively, he said. That’s less than the 4.7 percent drop previously reported.

The annual rate of real GDP growth since 1929 was revised up by 0.1 percentage point.

And the new data include some significant revisions to some individual quarters. The first quarter of 2011, for example, has been revised down from 0.1 percent growth rate to -1.3 percent. “The earthquake and tsunami that occurred in Japan in March 2011 disrupted critical supply chains, likely subtracting from growth in that quarter,” Mr. Krueger said.

He called such examples a reminder “that real-time economic data can be highly volatile and subject to substantial revision.”

The newly released report on this year’s second quarter is no exception: We’ll get a revised estimate of that number in a month.

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