The U.S. economy expanded at a faster pace in the second quarter as a smaller trade deficit and gains in inventories overshadowed the effects of federal budget cutbacks.
Gross domestic product rose at a 2.5% annualized rate, up from an initial estimate of 1.7%, Commerce Department figures showed today in Washington. The median forecast of 79 economists surveyed by Bloomberg projected a 2.2% gain.
The improvement is consistent with projections that the U.S. has been able to weather the fallout of government budget cuts and higher taxes and is poised to pick up once those restraints fade. Gains in employment and home prices that are shoring up confidence signal households will sustain spending, the biggest part of the economy.
“We will get stronger growth in the second half,” Sam Coffin, an economist at UBS Securities LLC in Stamford, Connecticut, said before the report. UBS is the top forecaster of GDP in the past two years, according to data compiled by Bloomberg. “Household spending growth is helping the economy. The drag from the government sector is going to be out of the way.”
Estimates for GDP, the value of all goods and services produced, ranged from gains of 0.3% to a 2.5%, based on forecasts from economists surveyed by Bloomberg.
Today’s revision paints a clearer picture of an economy gaining momentum after a drought, Superstorm Sandy and the battle over the impending fiscal cliff stalled growth in the last three months of 2012. The second quarter’s growth rate followed gains of 0.1% in the fourth quarter and 1.1% in the first three months of this year.
Consumer spending climbed 1.8%, the same as previously reported, propelled by gains in durable goods such as automobiles and appliances. That followed a 2.3% increase from January through March. Purchases added 1.2 percentage points to growth.
Consumers’ purchasing power improved, with disposable income adjusted for inflation rising at a 3.2% annualized rate from April through June after a 7.9% decrease in the first quarter. The saving rate in that period increased to 4.5% from 4.1%.
Today’s report also included revisions to first-quarter personal income. Wages and salaries fell by $46.2 billion, revised up by $10.7 billion from the previously reported $56.9 billion drop. They climbed by $55 billion in the second quarter.
Today’s report also offered a first look at corporate profits. Before-tax earnings rose at a 3.9% rate, the biggest gain since the fourth quarter of 2011, after falling at a 1.3% pace in the prior period. They climbed 5% from the same time last year.
Gross domestic income, which reflects all the money earned by consumers, businesses and government agencies climbed at a 2.5% annualized rate in the second quarter, matching the gain in GDP.
The trade deficit in the second quarter was smaller than previously estimated, reflecting the biggest gain in exports in more than two years. The gap was little changed from the first quarter, eliminating the 0.8 percentage-point drag previously estimated.
On the business side, corporate spending grew at a 9.9% annualized rate, exceeding the 9% gain previously reported. This reflected a $62.6 billion gain in stockpiles that was larger than first estimated. Smaller gains in outlays for equipment and intellectual property were offset by bigger increases in commercial construction.
Government spending fell at a 0.9% annualized rate, compared with a prior estimate of a 0.4% decline, as state and local outlays dropped.
Among other details, residential construction increased at a 12.9% annualized rate.
The rebound has spilled over into spending on remodeling. Atlanta-based Home Depot Inc., the largest U.S. home-improvement retailer, and smaller rival Lowe’s Cos., in Mooresville, North Carolina, each reported second-quarter profit that topped analysts’ estimates and raised their annual forecast.
Today’s report also showed price pressures remained contained. A measure of inflation, which is tied to consumer spending and strips out food and energy costs, rose at a 0.8% annualized pace. It was the weakest performance since the fourth quarter of 2010.
The lingering effect of fiscal tightening is expected to wane this quarter and the next. The payroll tax had reverted to its 2010 rate of 6.2% in January after holding at 4.2% for two years, resulting in lower take-home pay. About $85 billion in automatic across-the-board federal spending cuts, known as sequestration, started taking effect in March.
Consumers continue to spend on big-ticket items. Car and light truck sales are on track for the best year since 2007, figures from Ward’s Automotive Group show. Combined purchases of new and existing homes are the highest since 2009, according to Bloomberg data.
Federal Reserve officials were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to start reducing bond buying later this year if the economy improves, minutes of their July meeting showed.
Economic growth is projected at a 2.5% annualized pace in the second half of the year, according to the median forecast in a Bloomberg survey of economists this month.
There are also signs of improvement in overseas markets such as China, which is stabilizing after a two-quarter slowdown. The world’s second-biggest economy reported that industrial-profit growth rebounded in July, and also posted higher-than-forecast industrial production in July, a rebound in trade, and a stronger reading for a manufacturing index.