Economy Grows More Than First Estimated on U.S. Investment Gains

General Electric
Production assembly mechanic Keith Langevin prepares to install a bracket on a CFM56-7 jet engine at General Electric Co.'s GE Aviation factory in Cincinnati. Photographer: Luke Sharrett/Bloomberg

The biggest gain in U.S. business investment in over two years helped the world’s largest economy expand more than previously forecast in the second quarter, raising expectations for the rest of 2014.

Gross domestic product, the value of all goods and services produced, rose at a 4.2 percent annualized rate, up from an initial estimate of 4 percent and following a first-quarter contraction, Commerce Department reported today in Washington. Other reports showed the outlook for home sales improved in July, fewer people filed claims for jobless benefits last week and consumer confidence climbed.

Recent data showing American factories are receiving more orders and employment is picking up indicate companies such as General Electric Co. will probably see demand sustained into the second half of the year. Better growth prospects and little sign of inflation signal Federal Reserve officials can wind down monthly asset purchases while keeping interest rates low.

“The recovery is becoming more well-entrenched,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida, who correctly projected the gain in GDP. “There is more optimism among businesses about increased demand. Ultimately, the Fed has to think seriously about the end game, though there is no need to hit the brakes any time soon.”

The median forecast of 77 economists surveyed by Bloomberg called for a 3.9 percent gain in GDP. Estimates ranged from 3.5 percent to 4.3 percent.

The report also showed corporate profits climbed by the most in almost four years.

Shares Fall

Stocks dropped as concern over the Ukraine crisis overshadowed the improving economic data. The Standard & Poor’s 500 Index declined 0.2 percent to 1,995.96 at 11 a.m. in New York. The yield on the benchmark 10-year Treasury note fell to 2.33 percent from 2.36 percent late yesterday.

The number of Americans filing for unemployment benefits was little changed last week as employers held on to staff in an improving economy, figures from the Labor Department showed. Claims decreased by 1,000 to 298,000 in the week ended Aug. 23. The readings are hovering around the lowest levels of 2007, before the last recession began.

The drop in firings is probably helping Americans feel more secure in their jobs. The Bloomberg Consumer Comfort Index rose in the week ended Aug. 24 to the highest level in more than a month as views of household finances advanced to an almost four-month high, another report showed.

Business Investment

The revisions to GDP showed the pickup in growth last quarter came from bigger gains in corporate spending on structures and equipment and a smaller trade deficit that was partly offset by more tepid inventory building.

Stripping out inventories and trade, the two most volatile components of GDP, so-called final sales to domestic purchasers increased 3.1 percent, up from a previously reported 2.8 percent gain and the biggest advance in four years.

Business investment increased at an 8.1 percent annualized rate, the most since the first three months of 2012.

Companies are buying more equipment as earnings improve. Today’s report also offered a first look at corporate profits. Before-tax earnings rose 8 percent last quarter, the most since the third quarter of 2010, after a 9.4 percent drop in the prior period. They were still down 0.3 percent from the same time last year.

Corporate investment data are indicating a pickup. A surge in demand for airplanes helped push orders for durable goods up at a record pace in July, boosting prospects for sustained growth in manufacturing, a report showed on Aug. 26. Bookings for goods meant to last at least three years soared 22.6 percent after a revised 2.7 percent gain in June.

Rising Sales

General Electric posted second-quarter earnings that matched analysts’ estimates, helped by rising sales in units making jet engines and gas turbines. The Fairfield, Connecticut-based company said its backlog of equipment and services rose in every segment to a total of $246 billion.

“Our orders and backlog give us confidence in the second half and 2015,” Chief Executive Officer Jeffrey Immelt said on a July 18 conference call with analysts.

Household consumption, which accounts for about 70 percent of the economy, grew at a 2.5 percent annualized rate, the same as previously estimated.

Automobile sales near an eight-year high bode well for consumer spending and factory production. Cars and light trucks sold at a 16.4 million pace in July, following a 16.9 million rate the prior month that was the fastest rate since July 2006, figures from Ward’s Automotive Group showed.

Purchasing Power

Consumers’ purchasing power improved, with disposable income adjusted for inflation rising at a 4.2 percent from April through June after a 3.4 percent gain in the first quarter.

Gross domestic income, which reflects all the money earned by consumers, businesses and government agencies climbed at a 4.7 percent annualized rate in the second quarter, the most since early 2012.

More hiring and stock-market gains that are boosting confidence also are healing household finances, which will help consumer spending. Payrolls in July marked the sixth month of gains exceeding 200,000, the longest such stretch since 1997, according to the Labor Department.

Gap Inc., the owner of chains including its namesake, Banana Republic and Old Navy, is among companies hoping to benefit from an improving environment for shoppers. The San Francisco-based retailer posted second-quarter profit that topped analysts’ estimates.

Consumer Confidence

“The consumer is feeling slightly better, which we think is good for the overall industry,” Chief Executive Officer Glenn Murphy said on an Aug. 21 conference call with investors.

Housing also shows signs on strengthening. Contracts to purchase previously owned homes rose more than forecast in July, another report showed today. The pending home sales index gained 3.3 percent after a 1.3 percent decrease in June, the National Association of Realtors said. The median projection in a Bloomberg survey of economists called for the index to advance 0.5 percent.

Today’s GDP estimate is the second of three for the quarter, with the third release scheduled for late September when more information becomes available. The economy shrank at a 2.1 percent pace from January through March.

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