U.S. economy bounces back in second quarter

Employment growth exceeded 200,000 jobs in each of last 5 months
By Lucia Mutikani
|hrreporter.com|Last Updated: 07/30/2014

WASHINGTON (Reuters) — U.S. economic growth accelerated more than expected in the second quarter and the decline in output in the prior period was less steep than previously reported, bolstering views for a stronger performance in the last six months of the year.

Gross domestic product expanded at a four per cent annual rate as activity picked up broadly after shrinking at a revised 2.1 per cent pace in the first quarter, the Commerce Department said on Wednesday.

That pushed GDP above the economy's potential growth trend, which analysts put somewhere between a two per cent and 2.5 per cent pace. Economists had forecast the economy growing at a three per cent rate in the second quarter after a previously reported 2.9 pe rcent contraction.

A separate report showing private employers added 218,000 jobs to their payrolls last month, a decline from June's hefty gain of 281,000, did little to change perceptions the economy was strengthening.

U.S. stock futures added to gains and yields on U.S. Treasuries rose after the data. The U.S. dollar hit a seven-week high against the yen and an eight-month high against the euro.

The economy grew 0.9 per cent in the first half of this year and growth for 2014 as a whole could average above two per cent. The first quarter contraction, which was mostly weather-related, was the largest in five years.

Employment growth, which has exceeded 200,000 jobs in each of the last five months, and strong readings on the factory and services sectors from the Institute for Supply Management underpin the bullish expectations for the rest of the year.

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.

Eyes on the Fed

The GDP data, which was released only hours before Federal Reserve officials conclude a two-day policy meeting, could fuel debate on whether the central bank may need to raise interest rates a bit sooner than had been anticipated.

Growth in the second quarter was driven mainly by consumer spending and a swing in business inventories.

Consumer spending growth, which accounts for more than two-thirds of U.S. economic activity, accelerated at a 2.5 per cent pace, as Americans bought long-lasting manufactured goods and spent a bit more on services.

Consumer spending had braked to a 1.2 per cent pace in the first quarter because of weak health-care spending.

Despite the pickup 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.

Inventories contributed 1.66 percentage points to GDP growth after chopping off 1.16 points in the first quarter.

The economy also received a boost from business investment, government spending and investment in home building.

Trade, however, was a drag for a second consecutive quarter as some of the increase in domestic demand was met by a surge in imports. Domestic demand rose at a 2.8 per cent pace, the fastest since the third quarter of 2011. It increased at a 0.7 per cent pace in the first quarter.

Solid demand, which underscores the economy's firming fundamentals, led to some pickup in price pressures in the second quarter, a welcome development for Fed officials who have long worried about inflation being too low.

A price index in the report rose at a 2.3 per cent rate in the second quarter, the quickest in three years, after advancing at a 1.4 per cent pace in the prior period.

A core price measure that strips out food and energy costs increased at a two per cent pace, the fastest since the first quarter of 2012. It had increased at a 1.2 per cent rate in the first quarter.

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