GDP Growth Beats Expectations, Remains Soft

Photograph by Justin Ide/Bloomberg

The U.S. economy grew at an annual pace of 1.7 percent in the second quarter, according to the Bureau of Economic Analysis advance estimate, topping the 1 percent gain that was the median estimate of 84 economists surveyed by Bloomberg. A buildup of inventories was the big reason growth came in above expectations. With sequestration still in effect, government spending dropped, although not as much as in the first quarter. In a sign that the economy is too weak to generate price pressure, inflation in personal consumer expenditures was zero overall and 0.8 percent excluding food and energy, vs. the Federal Reserve’s target rate of 2 percent.

On the whole, economists took the report as a positive. “The recovery is gaining momentum and, at the margin, probably strengthening the Fed’s resolve to begin tapering its monthly asset purchases in September,” economist Paul Ashworth of Capital Economics in Toronto said in a note.

Along with its regular quarterly report, the Bureau of Economic Analysis released a “comprehensive revision” of historical GDP data that for the first time counted research and development and the creation of artistic originals as part of the nation’s output. (For more on that change, see my Opening Remarks column in Bloomberg Businessweek previewing the changes.) The average annual growth rate of real GDP was 3.3 percent from 1929 through 2012, 0.1 percentage point higher than previously estimated, the government said. For 2002-2012, the growth rate was 1.8 percent, 0.2 percentage point higher than previously estimated.

The revisions made investment’s contribution to GDP bigger and added $560 billion, or 3.6 percent, to the size of the U.S. economy as of 2012. Because previous years’ output was also raised, the change didn’t produce any big one-time jump in the economy’s growth rate. The revisions also made the 2007-09 recession appear a bit milder, with a total decline in GDP of 4.3 percent vs. the previously estimated 4.7 percent. “People ask if this is exaggerating GDP, and the answer is precisely no,” says Kim Schoenholtz, director of the Center for Global Economy and Business at New York University’s Stern School of Business. “What you’re seeing is just a better reading on the state of the economy. Our measurement science is improving.”

The growth statistics came out as the Federal Reserve’s Federal Open Market Committee was concluding a two-day meeting concerning the right monetary policy to get growth back on track. An announcement was scheduled for 2 p.m.

Growth in the third quarter should be stronger. In July, the first month of the third quarter, the private sector added 200,000 jobs, payroll processor ADP estimated on Wednesday. The U.S. Bureau of Labor Statistics’ official measure for July comes out Friday. Economists surveyed by Bloomberg are projecting gains of 195,000 jobs in the private sector and 185,000 overall. That implies a drop of 10,000 in government jobs, which is consistent with the Bureau of Economic Analysis’ report that government spending fell at a 0.4 percent rate in the second quarter.

GDP growth is likely to accelerate to 2.3 percent in the third quarter, 2.6 percent in the fourth quarter, and 2.8 percent in the first three months of 2014, according to the median estimate in Bloomberg’s survey.

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