WASHINGTON — The much-stronger-than-expected 4 percent rate of annual U.S. economic growth from April through June, reported Wednesday by the Commerce Department, put to rest fears that the U.S. economy was slipping into low gear.
Offsetting a dismal start to the year, the economy grew at a sizzling rate in the second quarter, powered by what the Bureau of Economic Analysis said were improvements in personal consumption, exports and businesses replenishing their inventories.
Adding to the sense of relief, earlier revisions to the negative rate of growth from January to March were revised yet again. What had earlier been thought to be a 2.9 percent contraction over the first three months of the year is now said to be a 2.1 percent contraction.
That means things werent as bad as they seemed, and the U.S. economy weathered a brutal winter. With a strong snap-back over the second quarter, the first six months of the year add up to a 1.9 percent rate of growth. Over the past 12 months, that rate is 2.4 percent.
I think the first quarter is the anomaly, said Gus Faucher, senior economist for PNC Financial Services Group in Pittsburgh. The fundamentals look pretty solid. Youve got gains in consumer spending that are being supported by gains in jobs growth.
Personal consumption expenditures increased at an annual rate of 2.5 percent from April to June, after growing by only 1.2 percent the previous quarter. Consumption powers about three-quarters of U.S. economic activity.
Friday will bring the Labor Departments monthly employment report, for July, and economists are expecting a sixth straight month of job gains above 200,000, something that hasnt happened since the late 1990s.
The ADP National Employment Report, a payroll-driven gauge of private-sector hiring, was released Wednesday and showed 218,000 new jobs over the past month. The government report has come in higher than the ADP estimates in recent months.
The improving outlook allowed the Federal Reserve to announce Wednesday that its trimming its purchases of government and mortgage bonds by another $10 billion per month to a monthly total of $25 billion. The Fed has bought bonds to stimulate economic activity. Its expected to end in its bond-buying program in October.
Most mainstream economic forecasters had expected second-quarter growth in the 3 percent range, about the inverse of what had been a 2.9 percent first-quarter contraction before Wednesdays revision. It would have meant the first half of the year was a wash, with a good quarter offsetting a bad one. Instead, the new numbers left the distinct impression of an economy accelerating.
In the second quarter, growth in consumer spending and business investment picked up from the previous quarter, and residential investment increased following two straight quarters of decline, noted Jason Furman, the head of the White House Council of Economic Advisers. Additionally, state and local government spending grew at the fastest quarterly rate in five years.
The numbers would have been even stronger had imports not surpassed the pace of exports and subtracted from growth. Exports grew at an annualized rate of 9.5 percent from April to June, offsetting a 9.2 percent decline from January through March.
Analysts said Wednesdays report boded well for the rest of the year.
On balance, todays report shows greater near-term healing and momentum, reducing the downside risks and leaving us comfortable with our forecast for above 3 percent growth through next year, Michelle Meyer, a senior U.S. economist at Bank of America Merrill Lynch, said in an investment note.
Economists at PNC Financial Services had been more bullish than most forecasters, predicting last Friday that the second-quarter growth rate would surprise at 4 percent.
Were feeling pretty good about that, said Faucher. We just knew, given the jobs numbers, that what we saw in the first quarter didnt make sense. The underlying fundamentals of the economy look pretty good.
Government statisticians on Wednesday also released revised estimates for growth over the past three years. They did so after incorporating additional reporting from industries and new tax data.
The new estimates dont fundamentally change the picture of the economy, Brian Moyer, the acting director of the Bureau of Economic Analysis, said in an advance briefing.
The revisions show that over 2011 to 2013, real gross domestic product_ the sum of U.S.-produced goods and services _ increased at an average rate of 2 percent. Thats lower than earlier estimates of 2.2 percent over the three-year period.
Last year, however, appears to have been better than first estimated. The bureau now estimates that the U.S. economy grew at an annual rate of 2.2 percent last year, not 1.9 percent as first thought.
Offsetting that improvement, 2012 was less robust than earlier thought. The earlier 2.8 percent rate of annual growth was revised to 2.3 percent, and 2011 was revised to 1.6 percent from an earlier 1.8 percent.