American Economy Sustains Slow Progress That’s Defined Expansion

The American economy is settling into a trot rather than a gallop, extending the slow progress that’s defined the current expansion after a first-quarter scare.

Gross domestic product rose at a 2.3 percent annualized rate from April through June after a revised 0.6 percent advance the prior three months that wiped out a previously reported drop, Commerce Department data showed Thursday in Washington.

Consumer spending led the way and is poised to sustain growth in the second half of 2015 as an improving job market, rising home and stock prices and low fuel costs propel demand. The figures underscore Federal Reserve Chair Janet Yellen’s view that increases in interest rates will be gradual to ensure the world’s largest economy keeps making headway.

“It’s not a sharp rebound, but it is a rebound, so that’s good,” said Nariman Behravesh, chief economist in Lexington, Massachusetts, for IHS Inc., who is the top GDP forecaster in the past two years, according to data compiled by Bloomberg. “The stage is set for better performance in the second half. Consumer spending will be the mainstay.”

The median forecast of 80 economists surveyed by Bloomberg projected GDP would show a 2.5 percent gain for the second quarter. The reading for the prior three months was revised from a previously reported 0.2 percent drop.

The Commerce Department also issued its annual revisions, updating the data back through 2012.

Annual Revision

The economic expansion over the past three years was weaker than initially projected, with the biggest revision coming in 2013. From the end of 2011 to the end of 2014, the economy expanded at a 2.1 percent annualized rate, compared to the 2.4 percent pace reported before. GDP grew 1.5 percent in 2013, the least since the throes of the recession in 2009, compared with a previously reported 2.2 percent gain.

Consumer spending climbed at a 2.9 percent annualized rate in this year’s second quarter following a 1.8 percent advance at the start of 2015. The Bloomberg survey median forecast was 2.7 percent. Purchases added 2 percentage points to growth.

“The U.S. consumer continues to chug along,” said Thomas Costerg, a senior economist at Standard Chartered Bank in New York, who correctly projected the second-quarter GDP gain. “The second half should be better as some of the headwinds for the economy will dissipate.”

Automobiles remain a steady source of strength for growth in consumer spending and for factory production. June sales of cars and light trucks capped the strongest quarter since 2005, according to figures from Ward’s Automotive Group.

Job Market

An improving job market is among reasons American households are underpinning economic growth. A report from the Labor Department Thursday showed fewer Americans than forecast filed applications for unemployment benefits last week. Jobless claims rose by 12,000 to 267,000 in the period ended July 25. The prior week’s 255,000 marked a four-decade low.

Nonetheless, shaky consumer confidence, reflecting concern that the Greek debt crisis and economic slowdown in China will filter to the U.S., raises a risk that spending will cool.

The Bloomberg Consumer Comfort Index declined to 40.5 in the week ended July 26, matching the second-lowest level since November, from 42.4. It suffered the biggest setback in five months as households’ attitudes about their finances and the economy deteriorated.

Business spending remained a sore spot last quarter, with investment outside of residential real estate falling at a 0.6 percent rate, the worst performance since the third quarter of 2012. The decline was led by a slump in mines and oil and gas wells as fuel prices dropped.

Oil Infrastructure

The second quarter probably marked the low point as energy costs have stabilized which means spending on oilfield infrastructure will become less of a drag on the economy.

The GDP report also showed price pressures picked up. A measure of inflation, which is tied to consumer spending and strips out food and energy costs, climbed at a 1.8 percent annualized pace compared with 1 percent gains in the prior two quarters.

Fed policy makers on Wednesday said the labor market and housing have improved, moving closer to ending an unprecedented period of near-zero interest rates without providing a clear signal on the timing of liftoff.

“Economic activity has been expanding moderately in recent months,” the central bank said in a statement. At the same time, “business fixed investment and net exports stayed soft.”

One aspect of the second-quarter GDP report that concerned economists was that stockpiles remained elevated. The back-to-back increases in inventories for the first two quarters of the year were the biggest on record.

The buildup “poses a significant hurdle to industrial production in the second half of the year,” Bloomberg Intelligence economists Carl Riccadonna and Josh Wright said in a note.

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