Economy in U.S. Expands More Than Forecast on Inventories

The economy in the U.S. grew more than projected in the second quarter, showing it is overcoming the cuts in government spending and higher taxes.

Gross domestic product, the value of all goods and services produced, rose at a 1.7 percent annualized rate after a 1.1 percent gain the prior quarter that was smaller than previously estimated, Commerce Department figures showed today in Washington. Other reports showed hiring and manufacturing accelerated this month.

The GDP figures showed companies invested in new equipment and construction projects, and a pickup in orders for durable goods indicates the gains will be sustained into the second half of the year. The effects of government budget cuts will probably wane, while job gains and rising home and stock prices are shoring up consumer sentiment, making it more likely households will regain momentum after spending cooled last quarter.

“The worst of the fiscal drag is now behind us,” said Maury Harris, the New York-based chief economist for UBS Securities LLC and the best GDP forecaster over the past two years, according to data compiled by Bloomberg. “Business confidence is recovering and capital expenditures are recovering.” Harris projected growth will accelerate to about 3 percent in the last six months of 2013.

Federal Reserve policy makers said today at the conclusion of their two-day meeting that “economic growth will pick up from its recent pace and the unemployment rate will gradually decline.” The Federal Open Market Committee also said it will maintain its $85 billion in monthly bond purchases aimed at stoking the expansion and boosting employment.

Fed Tapering

The Fed may begin tapering the pace of its asset purchases in September, according to a growing number of economists surveyed by Bloomberg from July 18 to July 22.

Companies boosted payrolls in July by the most this year as employers grew more optimistic demand will pick up, another report showed. Employment increased by 200,000 following a 198,000 gain in June that was higher than initially estimated, according to data from the ADP Research Institute in Roseland, New Jersey. The median forecast of 40 economists surveyed by Bloomberg called for a July advance of 180,000.

Stocks erased an earlier rally after the Fed refrained from indicating when it will dial back the pace of monetary stimulus. The Standard & Poor’s 500 Index fell less than 0.1 percent to 1,685.72 at the close in New York. Treasury securities rallied, pushing the yield on the benchmark 10-year note down to 2.58 percent from 2.61 percent late yesterday.

Payroll Forecast

A Labor Department report in two days will show private payrolls, excluding government jobs, climbed 195,000 in July after a 202,000 increase a month earlier, according to the median estimate of economists surveyed by Bloomberg. Total employment rose by 185,000 following a 195,000 gain in June, the survey also showed. The jobless rate fell to 7.5 percent, matching a four-year low, from 7.6 percent in June, economists projected.

“If the unemployment rate keeps falling as we expect, the Fed will be tapering and cutting back on asset purchases starting in September,” said Dean Maki, the New York-based chief U.S. economist for Barclays Plc and a former Fed economist. “The fact that the Q2 momentum was a little better than expected may be seen by the Fed as consistent with their second-half forecast.”

In their last meeting in June, Fed policy makers projected the economy will have grown between 2.3 percent to 2.6 percent in this year’s fourth quarter from the same time in 2012. It would take a 3.2 percent annualized gain on average in the last six months of the year to meet their minimum projection, according to Bloomberg calculations.

German Unemployment

The job market is also improving among some U.S. trading partners as data from Germany today showed the country’s unemployment rate in July held near a two-year low even as the rate in the euro area stayed at a record high.

The median forecast of 85 economists surveyed by Bloomberg projected U.S. GDP would advance at a 1 percent pace last quarter. Estimates ranged from a 0.1 percent drop to a 1.8 percent increase. The reading is the first of three for the quarter, with the other releases scheduled for August and September when more information becomes available.

Business activity in the U.S. expanded in July, adding to signs that a recovery in manufacturing will support economic growth, another report signaled today. The MNI Chicago Report’s business barometer increased to 52.3 from 51.6 in June. A reading above 50 signals expansion.

Comprehensive Revisions

The Commerce Department also issued comprehensive revisions with today’s report that showed the recovery from the worst U.S. recession in the post-World War II era has been stronger than previously estimated. It’s also been more uneven. The updates affected data back to 1929.

GDP expanded 1.4 percent in the second quarter from the same time in 2012 compared with a 1.3 percent year-to-year gain in the previous three months, today’s report showed.

Consumer spending climbed 1.8 percent, also more than projected, after increasing 2.3 percent in the first three months of the year. The gain in household consumption, which accounts for about 70 percent of the economy, compared with a 1.6 percent median forecast in the Bloomberg survey. Purchases added 1.2 percentage points to growth.

Some of the slowdown last quarter may have been the lingering effect of the increase in the payroll tax, which reverted to its 2010 rate of 6.2 percent in January after holding at 4.2 percent for two years, resulting in lower take-home pay.

Government Spending

Today’s report also showed government spending fell at a 0.4 percent annualized rate, reflecting cutbacks in non-defense outlays. Another round of fiscal tightening started taking effect in March with the $85 billion in automatic across-the-board federal spending cuts known as sequestration.

“The outlook for the second half is that growth gets stronger as the fiscal drag fades,” said Harm Bandholz, chief U.S. economist at UniCredit Group in New York, who predicted 1.8 percent growth. “The consumer is looking resilient, though a bit weaker.”

The GDP report also showed price pressures slackened. A measure of inflation, which is tied to consumer spending was unchanged in the second quarter, the weakest performance since 2009. Fed policy makers aim for increases of 2 percent.

Corporate spending on equipment climbed at a 4.1 percent annualized pace. American factories received more orders for automobiles and machinery in June, pointing to a pickup in manufacturing, Commerce Department data last week showed. Bookings for goods meant to last at least three years rose 4.2 percent, three times the median forecast of economists surveyed by Bloomberg.

Trade Deficit

Today’s report also showed the trade deficit widened as imports climbed faster than exports, subtracting 0.8 percentage point from GDP growth, a sign the U.S. economy is performing better than its counterparts.

Gains in hiring and record household wealth, in large part driven by rising stock prices and home values, will support sentiment and allow Americans to sustain spending. The Bloomberg Consumer Comfort Index matched its highest level in more than five years during the week ended July 21.

Purchases of big-ticket items such as automobiles remain a bright spot. Cars and light trucks sold at a 15.9 million annualized rate in June, the strongest since November 2007, according to figures from Ward’s Automotive Group.

Home Values

The real-estate market also continues to strengthen as historically low borrowing costs drive demand and lift prices, indicating homebuilding may keep advancing. The S&P/Case-Shiller index of house values in 20 cities climbed 12.2 percent in May from a year earlier, the biggest 12-month gain since March 2006, a report showed yesterday.

United Technologies Corp., the maker of Carrier air conditioners, Pratt & Whitney jet engines and Otis elevators, is among companies citing gains in auto sales and housing starts as reasons to expect an improvement in coming quarters.

“The economy is recovering and we are seeing strength in the leading sectors,” Gregory Hayes, chief financial officer at the Hartford, Connecticut-based company, said on a July 23 earnings call. “Talk about economic uncertainty remains, but overall, our orders position us well for growth in the second half of the year.”

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