The economy in the U.S. grew more than projected in the second quarter reflecting an unexpected pickup in inventory building as consumer spending cooled. Growth in the previous three months was revised down.
Gross domestic product, the value of all goods and services produced, rose at a 1.7% annualized rate, after a 1.1% gain the prior quarter, Commerce Department figures showed today in Washington. The median forecast of 85 economists surveyed by Bloomberg called for a 1% advance for last quarter. Consumer spending, the biggest part of the economy, climbed 1.8% after increasing 2.3%.
Job gains and rising home prices are shoring up Americans’ confidence and lifting automobile sales and production, making it likely the U.S. will pick up once government spending cuts and tax increases pose less of a restraint. The report also showed inflation is falling further below the Federal Reserve’s goal as official wrap up a two-day meeting today to determine whether to trim monthly bond purchases aimed at spurring growth.
“There are encouraging signs the economy can withstand the fiscal restraint,” Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh, who projected a 1.5% increase in GDP, said before the report. “Everything looks and feels better. We should see a generally better second half than first half, and a stronger second half this year than last year.”
Companies boosted payrolls in July by the most this year as employers grew more optimistic demand will pick up in the second half of the year, another report showed. The 200,000 increase in employment was more than projected and followed a revised 198,000 gain in June that was higher than initially estimated, according to data from the ADP Research Institute in Roseland, New Jersey. The median forecast of 40 economists surveyed by Bloomberg called for a July advance of 180,000.
Stock-index futures dropped after the GDP report erasing earlier gains. The contract on the Standard & Poor’s 500 Index maturing in September fell 0.1% to 1,683.2 at 8:38 a.m. in New York.
Economists’ estimates for GDP ranged from a 0.1% drop to a 1.8% increase. The GDP estimate is the first of three for the quarter, with the other releases scheduled for August and September when more information becomes available.
The Commerce Department also issued comprehensive revisions with today’s report that showed the recovery from the worst U.S. recession in the post-World War II era has been stronger than previously estimated. It’s also been more uneven. The updates affected data back to 1929.
The economy expanded 1.4% in the second quarter from the same time in 2012 compared with a 1.3% year-to-year gain in the previous three months.
A gain in stockpiling in the second quarter boosted second- quarter growth by 0.4 percentage points. Most economists had projected inventories would subtract from GDP. Business investment and housing also boosted the economy.
The gain in household consumption, which accounts for about 70% of the economy, compared with a 1.6% median forecast in the Bloomberg survey. Purchases added 1.2 percentage point to growth.
Domestic final sales -- which strip out inventories, exports and imports -- increased 1.3% after rising 0.2% in the first quarter.
Some of the slowdown in consumption may have been the lingering effect of the payroll tax, which reverted to its 2010 rate of 6.2% in January after holding at 4.2% for two years, resulting in lower take-home pay.
Another round of fiscal tightening started taking effect in March with the $85 billion in automatic across-the-board federal spending cuts known as sequestration.
Today’s report showed government spending fell at a 0.4% annualized rate. State and local outlays increased at a 0.3% rate, while spending by federal agencies dropped at a 1.5% pace.
Corporate spending on equipment climbed at a 4.1% annualized pace. A new category that reflects outlays on computer software and other intellectual property such as research and development and some forms of entertainment rose at a 3.8% pace.
The trade deficit widened, subtracting 0.8 percentage point from GDP growth.
Residential construction increased at a 13.4% annualized rate, adding 0.4 percentage-point to growth.
The report also showed price pressures slackened. A measure of inflation, which is tied to consumer spending was unchanged in the second quarter, the weakest performance since 2009. Fed policy makers aim for increases of 2%. Stripping out food and energy, costs climbed at a 0.8% annualized pace compared with 1.4% in the prior quarter.
The Fed may begin trimming its $85 billion in monthly bond purchases in September, according to a growing number of economists surveyed by Bloomberg from July 18 to July 22. None of the 54 respondents expect the reductions to begin following the central bank’s meeting this week.
Gains in hiring and record household wealth, that’s in large part driven by rising stock prices and home values, will support sentiment and allow Americans to sustain spending. The Bloomberg Consumer Comfort Index matched its highest level in more than five years during the week ended July 21.
Some businesses are counting on an improvement in household spending to be reflected in growing demand at transportation companies.
“Later in the third quarter, the fourth quarter, there should be decent consumer sentiment for a strong retail season,” Eric Butler, an executive vice president at Omaha, Nebraska-based Union Pacific Corp., the largest U.S. railroad company, said on a July 18 earnings call. “If that happens, you will need to move the business because there are not a lot of inventories out there. So that would suggest a pickup from where we are today.”
Purchases of big-ticket items such as automobiles remain a bright spot. Cars and light trucks sold at a 15.9 million annualized rate in June, the strongest since November 2007, according to figures from Ward’s Automotive Group.
The real-estate market also continues to strengthen as historically low borrowing costs drive demand and lift prices, indicating homebuilding may keep advancing. The S&P/Case-Shiller index of house values in 20 cities climbed 12.2% in May from a year earlier, the biggest 12-month gain since March 2006, a report showed yesterday.
United Technologies Corp., the maker of Carrier air conditioners, Pratt & Whitney jet engines and Otis elevators, is among companies citing gains in auto sales and housing starts as reasons to expect an improvement in coming quarters.
“The economy is recovering and we are seeing strength in the leading sectors,” Gregory Hayes, chief financial officer at the Hartford, Connecticut-based company, said on a July 23 earnings call. “Talk about economic uncertainty remains, but overall, our orders position us well for growth in the second half of the year.”