Robust US economy emerges from new GDP stats

An assembly line worker builds cars in a US auto plant. The US economy grew at a faster than expected 4 per cent annual rate in the latest quarter after a grim start to 2014. Photo / AP

The US economy has rebounded with vigour from a grim start to 2014 and should show renewed strength into next year.

That was the general view of analysts after the government estimated that the economy grew at a fast 4 per cent annual rate in the April-June quarter. Consumers, businesses and governments joined to fuel the second-quarter expansion. The government also said growth was more robust last year than it had previously estimated.

Whether the healthier expansion will lead the Federal Reserve to raise interest rates sooner than expected is unclear. In a statement it issued after a policy meeting, the Fed offered no clearer hint of when it will start raising its benchmark short-term rate.

The economy sprang back to life after a dismal winter in which it shrank at a sharp 2.1 per cent annual rate. The government upgraded that figure from a previous estimate of a 2.9 per cent drop. But it was still the biggest contraction since early 2009 in the depths of the Great Recession.

Last quarter's bounce-back reinforced analysts' view that the economy's momentum is extending into the second half of the year, when they forecast annual growth of around 3 per cent.

The government also updated its estimates of growth leading into this year. They show the economy expanded in the second half of 2013 at the fastest pace in a decade and more than previously estimated. The revised data also show that the economy grew faster in 2013 than previously estimated, though more slowly in 2011 and 2012 than earlier thought.

The second quarter's growth in the gross domestic product - the total output of goods and services - was the fastest since a 4.5 per cent increase in July-September quarter of 2013.

At the same time, a higher trade deficit slowed growth as imports outpaced an increase in exports.

Paul Ashworth, chief US economist at Capital Economics, said that given last quarter's rebound, he's boosting his estimate for growth this year to 2 per cent, up from a previous 1.7 per cent forecast. Ashworth said the economy's growth also supported his view that the Fed will be inclined to start raising rates early next year.

Most economists have been predicting that the Fed would wait until mid-2015 to start raising rates.

"This GDP report supports our view that an improving economy will persuade the Fed to begin raising rates in March next year," Ashworth wrote in a research note.

Ashworth is among a group of economists who think growing strength in the job market and the economy will prod the Fed to move faster to raise rates to make sure inflation doesn't get out of hand.

Stock prices turned generally negative in the wake of the GDP report because some investors saw a greater likelihood that the Fed would raise rates sooner than expected.

Good news or bad news for Wall St?

"We're at the point where we're not sure if good news is good news or bad news," said Jim Paulsen, chief investment strategist at Wells Capital Management.

The GDP report showed that one measure of inflation rose 2 per cent last quarter, up from a 1.3 per cent rise in the first quarter. The Fed's inflation target is 2 per cent, and for two years the GDP measure of inflation has been running below that level. Low inflation has given the Fed leeway to focus on boosting growth to fight high unemployment.

In its statement, the Fed noted that inflation had risen closer to its 2 per cent target. The statement said concerns that inflation would run persistently below the Fed's 2 per cent target had "diminished somewhat." But it expressed no concerns about the slight acceleration in prices.

The economy's sudden contraction in the first quarter had resulted from several factors. A severe winter disrupted activity across industries and kept consumers away from shopping malls and auto dealerships. Consumer spending slowed to an annual growth rate of 1.2 per cent, the weakest in nearly three years.

Last quarter, consumer spending accelerated to a growth rate of 2.5 per cent. Spending on durable goods such as autos surged at a 14 per cent annual rate, the biggest quarterly gain since 2009. Analysts said that was an encouraging sign of consumers' growing willingness to buy high-cost items like cars.

"Better job growth, a rising stock market, falling petrol prices - all those things are starting to resonate on Main Street," said Stuart Hoffman, chief economist at PNC Financial Services Group.

Hoffman suggested that five straight months of job gains above 200,000 were buoying both consumer and business confidence. He predicted that the July jobs report, to be released Friday, would show job growth of around 225,000.

"I think the economy has finally moved from the slow lane to the passing lane," Hoffman said. He predicted growth of around 3 per cent over the next year.

Will it make the Fed move early?

Still, he said he didn't think the faster growth would lead the Fed to accelerate its first rate increase. Even with higher prices last quarter, inflation remains within the Fed's 2 per cent target.

In the April-June quarter, business investment in equipment jumped at a 7 per cent rate after having fallen in the first quarter. Businesses also increased their stockpiling. The increase in inventories contributed two-fifths of the growth in the quarter.

Housing, which had been falling for two straight quarters, rebounded in the spring, growing at a 7.5 per cent annual rate.

Government spending also recovered after two consecutive declines. The strength came from state and local governments, which offset the seventh quarterly decline in federal government spending.

The government's revised estimates going back to 2011 show the economy expanded at an annual rate of 4.5 per cent in last year's third quarter, up from a previous 4.1 per cent estimate. The growth rate was 3.5 per cent in the fourth quarter, up from an earlier 2.6 per cent estimate.

For 2013 as a whole, the government said the economy grew 2.2 per cent, up from its earlier 1.9 per cent estimate. But growth was weaker in 2011 and 2012 than previously estimated. It grew 2.3 per cent in 2012, down from 2.8 per cent. And growth in 2011 was downgraded to 1.6 per cent from 1.8 per cent.