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US economic growth accelerates in second quarter as spending picks up US economic growth accelerates in second quarter as spending picks up
(about 3 hours later)
US economic growth accelerated in the second quarter as a pick-up in consumer spending offset the drag from soft business spending on equipment, suggesting a steady momentum that could bring the Federal Reserve closer to hiking interest rates this year. The US economy accelerated in the second quarter, further raising the prospect that the Federal Reserve will raise interest rates – which have been held near zero since the financial crisis – as early as September.
Gross domestic product expanded at a 2.3% annual rate, the Commerce Department said on Thursday. First-quarter GDP, previously reported to have shrunk at a 0.2% pace, was revised up to show it rising at a 0.6% rate. US gross domestic product (GDP) rose by 2.3% in the three months to the end of June, the Commerce Department said on Thursday. The growth figure is slightly lower than the 2.5% that economists predicted but much higher than the growth in the first quarter.
The revision to first-quarter growth reflected steps taken by the government to refine the seasonal adjustment for some components of GDP, which economists said left residual seasonality in the data, as well as new source data. GDP in the first quarter, which was previously reported to have shrunk by 0.2%, was revised up to a 0.6% increase. However, GDP revisions for the past three years reveal that the economy’s already-modest growth since 2011, particularly in 2013, was even weaker than previously thought.
The Fed on Wednesday described the economy as expanding “moderately” while upgrading its view of the labor market and saying housing had shown “additional” improvement. The Fed’s assessment left the door open for a possible hike in interest rates in September, which would be the first rise since 2006. The second quarter’s accelerated growth raises the prospect that the Fed will hike the benchmark overnight federal funds rate, which has been held at a record low of 0-0.25% since December 2008, in September.
While second-quarter GDP growth was a bit below economists’ expectations for a 2.6% rate, the growth composition pointed to firming fundamentals. On Wednesday the Fed said the the economy was expanding “moderately”. The US central bank has said rates will rise “when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term”.
A measure of private domestic demand, which excludes trade, inventories and government expenditures, increased at a 2.5% rate after rising at a 2.0% pace at the start of the year. While the Fed chair, Janet Yellen, has left little doubt that rates will rise this year, the Fed left itself wiggle room as it has set no timetable and said rates would only be raised if the economy continues to improve and unemployment continues to fall.
Traders expect rates to be raised at the Fed’s next policy meeting on 16-17 September, when Yellen will hold a press conference. The central bank has another meeting scheduled for December.
Steve Murphy, US economist at Capital Economics, said: “The second-quarter US GDP data support the Fed’s more upbeat tone on economic conditions and suggests that the economy could cope with higher interest rates.”
James Knightley, economist at ING, said the previous years’ downward revisions “may lead some at the Fed to conclude that the US may have marginally more spare capacity than previously thought, which would reduce the need for an imminent rate rise”.
“However, given the fairly strong rhetoric from officials and the focus on the labour data we doubt that it would block a September hike assuming the next two payroll reports are strong – note that today’s initial jobless claims remain very low at 267,000,” Knightley said.
Earlier this month, Yellen told Congress: “Our economy is in a much better state. Low interest rates have facilitated it, and a decision on our part to raise rates will say, ‘No, the economy doesn’t stink.’
“We’re close to where we want to be, and we now think the economy can not only tolerate but needs higher rates. So there have been headwinds, and we’ve tried to use monetary policy to overcome them.”
US markets dipped slightly after the data was released. The Dow Jones index was down 0.17% to 17,720 points at 11.40am.
Growth in the second quarter was boosted by consumer spending as households used some of the windfall from cheaper gasoline in late 2014 and early this year to go shopping. The strengthening labor market also encouraged consumers to loosen their purse strings.Growth in the second quarter was boosted by consumer spending as households used some of the windfall from cheaper gasoline in late 2014 and early this year to go shopping. The strengthening labor market also encouraged consumers to loosen their purse strings.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 2.9% rate from a downwardly revised 1.8% pace in the first quarter. Consumer spending was previously reported to have increased at a 2.1% rate at the start of the year. Consumer spending, which accounts for more than two-thirds of US economic activity, grew at a 2.9% rate from a downwardly revised 1.8% pace in the first quarter. Consumer spending was previously reported to have increased at a 2.1% rate at the start of the year.
The saving rate fell to 4.8% from 5.2%.
A firming housing market also supported the economy in the second quarter, as did exports, and state and local government spending.
However, the energy sector continued to weigh on growth as it struggles with the lingering effects of deep spending cuts by oil-field companies like Schlumberger and Halliburton in the aftermath of a more than 60% plunge in crude oil prices last year.
Business spending on structures fell at a 1.6% rate after stumbling 7.4% at the start of the year. Equipment spending fell at a 4.1% rate.
Spending on mining exploration, wells and shafts plunged at a 68.2% rate, the largest decline since the second quarter of 1986. This category dropped at a 44.5% pace in the first quarter.
But there are signs that the energy spending rout might be nearing an end. Data last Friday showed US energy firms added 21 oil rigs last week, marking the third increase over the past 33 weeks.
Schlumberger said last week it believed the North American rig count may be bottoming and that a slow rise in both land drilling and completion activity could occur in the second half of the year.
Exports rebounded in the second quarter, despite a strong dollar, while imports rose moderately. That left a smaller trade deficit that added 0.13 percentage point to GDP growth.
Inventory investment slowed after the first quarter’s brisk pace. Businesses accumulated $110.0 billion worth of merchandise, down from $112.8 billion in the first quarter. While inventories did not add to second-quarter GDP growth, that is good news for the remainder of the year.
With oil prices having risen during the second quarter and consumer spending having picked up, inflation pressures accelerated sharply.
The personal consumption expenditures price index rebounded at a 2.2% rate, the fastest since the first quarter of 2012, after falling at a 1.9% rate at the start of the year. Excluding food and energy, prices increased at a 1.8% pace.