U.S. Second-Quarter GDP Expands at 4.0% Rate

Economy Grew at Best Six-Month Stretch in 10 Years in Second Half of 2013

By ERIC MORATH And
NICK TIMIRAOS
Updated July 30, 2014 10:56 a.m. ET



WASHINGTON—The U.S. economy surged in the second quarter, more than offsetting a first-quarter contraction and putting growth back on an upward trajectory in 2014.

Gross domestic product, the broadest measure of goods and services produced across the economy, advanced at a seasonally adjusted annual rate of 4.0% in the second quarter, the Commerce Department said Wednesday.

Economists surveyed by The Wall Street Journal had forecast growth at a 3.0% pace for the quarter.

More on U.S. GDP





An upturn in inventory building by businesses and an acceleration in consumer spending led the broad gains and offset a larger drag from increased imports.

The solid improvement comes on the heels of a first quarter when the economy shrank at a 2.1% pace. While still the worst quarter of the recovery that began in mid-2009, the first-quarter figure reflects an upward revision from a previously estimated 2.9% contraction.

Over the past year, the economy grew 2.4%—slightly ahead of the 2.3% average annual gain from recovery's start until the end of 2013, before an unusually cold winter socked the economy.

The first-quarter "was an anomaly and growth will be much stronger through the rest of this year," said PNC Financial Services Group economist Stuart Hoffman. "Consumers are spending thanks to job and income gains, and with borrowing costs still low businesses are investing to meet stronger demand."







Annual revisions, also released Wednesday, showed the economy expanded at a 4% pace in the second half of 2013, the best six-month stretch in 10 years. But figures over the past five years, including new revisions back to 2011, continue to tell a familiar tale. Unable to string together several quarters of steady growth, the recovery that began in 2009 is still the weakest since World War II.

Wednesday's report showed household spending advanced at a 2.5% rate last quarter, an increase from the first quarter's modest 1.2% gain. Spending on total goods accounted for its highest contribution to GDP since late 2010, and spending on long-lasting durable goods was near a five-year high, led by a big jump in auto sales.

At least part of that increase is payback for a cold winter that kept consumers away from malls and car dealers.

The "first quarter would not have been as bad without the weather," said Peter Schiff, chief executive of Euro Pacific Capital. "But second quarter would not been as good without the bounce that you usually get following a bad winter."

The second quarter was also strongly aided by businesses restocking. The change in private inventories added 1.66 percentage points to growth during the quarter. The gain mirrors the strong buildup in inventories that helped propel growth in the second half of last year, and stands in contrast to the reversal that contributed to the first-quarter contraction.

Real final sales, a measurement of GDP that excludes changes to inventories expanded at a 2.3% pace in the second quarter. That compares with a 1% contraction in the first quarter.

The latest numbers are unlikely to have an immediate influence on Federal Reserve policy makers as they conclude a two-day meeting Wednesday. The Fed is expected to cut its monthly bond purchases to $25 billion from $35 billion, and down from $85 billion when the program began in 2012.

The output figures, however, could weigh on the Fed's calculation for when to start raising short-term interest rates. A return to consistently stronger growth could support the argument to increase rates sooner, though the initial GDP reading is subject to revisions. Policy makers must now consider the down-then-up first half alongside a swiftly improving labor market.

U.S. employers have added better than 200,000 jobs for five straight months. Economists expect the next jobs report, due out Friday, will show that string continued into July.

Employment gains should support stronger economic growth in the year's second half. The latest GDP figures bring economic growth more in line with the pace of hiring, but with paychecks barely staying ahead of inflation and low-wage and temporary fields leading hiring, economic gains remain somewhat muted.

Wednesday's report also showed business spending on items such as equipment, buildings and intellectual property rose at a 5.5% pace from April to June. Spending on equipment increased at a 7% rate in the second quarter after declining in the first.

The U.S. second-quarter GDP increased at a 4.0% rate, well above expectations, raising hopes for sustained growth in the second half of 2014. WSJ's Polya Lesova joins Simon Constable on the News Hub with the details. Photo: Getty

Residential fixed investment—spending on home building and improvements—increased at a 7.5% rate in the second quarter. The category had declined the prior two quarters.

The decline that began last fall wasn't actually due to a slowdown in home construction, but instead reflected a drop in brokers' real-estate commissions after sales of previously owned homes slumped.

Trade was a drag on economic growth during the quarter despite a solid 9.5% increase in U.S. exports. That is because imports, which subtract from economic growth, rose 11.7%. Still, the number suggests renewed demand for foreign goods among U.S. consumers.

The government added to second-quarter growth.

Government expenditures and investment rose at an 1.6% pace in the spring. Federal outlays fell for the seventh straight quarter but were more than offset by increased spending at the state and local level.

The GDP figures are adjusted for inflation. The report showed the personal consumption expenditure price index, the Fed's preferred inflation gauge, advanced at an annualized 2.3% in the second quarter. That was an acceleration from the first quarter, and above to Fed's 2% inflation target during a quarter for the first time since early 2012.

The inflation figure reflects increased costs for food, gasoline and housing in the second quarter. From a year ago, consumer inflation is up a milder 1.6%.

Write to Eric Morath at eric.morath@wsj.com and Nick Timiraos atnick.timiraos@wsj.com

http://online.wsj.com/articles/secon...ate-1406723867