Growth Beats Estimate as U.S. Weathers Budget Cuts: Economy

The U.S. economy expanded more than estimated in the second quarter, providing evidence that growth is picking up as the nation overcomes the effects of federal tax increases and budget cuts.

Gross domestic product rose at a 2.5 percent annualized rate, up from an initial estimate of 1.7 percent, Commerce Department figures showed today in Washington. The median forecast of 79 economists surveyed by Bloomberg projected a 2.2 percent gain. Other reports today showed claims for unemployment benefits dropped and consumer confidence weakened.

The improvement in growth shows the world’s largest economy gaining momentum after a drought, Superstorm Sandy and budget battles in Washington stalled growth in the last three months of 2012. Recent data have shown the labor market is gaining strength while home prices rise, bolstering household finances.

“The economy is doing fine,” said Brian Jones, a senior U.S. economist at Societe Generale in New York, who correctly projected the gain in GDP. “It is going to weather the sequestration. Growth will accelerate in the second half.”

Jobless claims in the week ended Aug. 24 declined by 6,000 to 331,000, according to figures from the Labor Department. The decrease was in line with the median forecast of 50 economists surveyed by Bloomberg that called for a drop to 332,000. The number of applications slumped to a more than five-year low of 322,000 earlier this month, a sign that the labor market continues to make progress.

Shares Advance

Stocks advanced, sending the Standard & Poor’s 500 Index higher for a second day. The gauge climbed 0.2 percent to 1,638.17 at the close in New York.

Elsewhere today, reports showed German unemployment unexpectedly rose in August for the first time in three months and inflation slowed in a sign Europe’s biggest economy is cooling after a second-quarter surge.

Estimates for U.S. GDP, the value of all goods and services produced, ranged from gains of 0.3 percent to 2.5 percent, based on forecasts from economists surveyed by Bloomberg.

Today’s revision paints a clearer picture of an economy gaining momentum. The second quarter’s growth rate followed gains of 0.1 percent in the fourth quarter and 1.1 percent in the first three months of this year.

Consumer Spending

Consumer spending climbed 1.8 percent, the same as previously reported, propelled by gains in durable goods such as automobiles and appliances. That followed a 2.3 percent increase from January through March. Purchases added 1.2 percentage points to growth.

Consumers’ purchasing power improved, with disposable income adjusted for inflation rising at a 3.2 percent annualized rate from April through June after a 7.9 percent decrease in the first quarter. The saving rate in that period increased to 4.5 percent from 4.1 percent.

Today’s report also included revisions to first-quarter personal income. Wages and salaries fell by $46.2 billion, revised up by $10.7 billion from the previously reported $56.9 billion drop. They climbed by $55 billion in the second quarter.

Other data today showed consumer confidence fell for a third straight week, reaching the lowest level in more than four months, as Americans’ views on the economy, finances and spending soured. The Bloomberg Consumer Comfort Index declined to minus 31.7 for the period ended Aug. 25, its worst reading since April 7, from minus 28.8 a week earlier. The gauge has dropped 8.2 points in the three weeks since reaching a more than five-year high.

Households Unsettled

Rising mortgage rates and concern that turmoil in the Middle East will push up fuel costs is probably unsettling households. That means it will take bigger gains in employment and incomes to keep propelling consumer spending.

Today’s GDP report also offered a first look at corporate profits. Before-tax earnings rose at a 3.9 percent rate, the biggest gain since the fourth quarter of 2011, after falling at a 1.3 percent pace in the prior period. They climbed 5 percent from the same time last year.

Gross domestic income, which reflects all the money earned by consumers, businesses and government agencies, climbed at a 2.5 percent annualized rate in the second quarter, matching the gain in GDP.

The trade deficit in the second quarter was smaller than previously estimated, reflecting the biggest gain in exports in more than two years. The gap was little changed from the first quarter, eliminating the 0.8 percentage-point drag previously estimated.

Business Investment

On the business side, corporate spending grew at a 9.9 percent annualized rate, exceeding the 9 percent gain previously reported. This reflected a $62.6 billion gain in stockpiles that was larger than first estimated. Smaller gains in outlays for equipment and intellectual property were offset by bigger increases in commercial construction.

Government spending fell at a 0.9 percent annualized rate, compared with a prior estimate of a 0.4 percent decline, as state and local outlays dropped.

Among other details, residential construction increased at a 12.9 percent annualized rate.

The rebound has spilled over into spending on remodeling. Atlanta-based Home Depot Inc., the largest U.S. home-improvement retailer, and smaller rival Lowe’s Cos., in Mooresville, North Carolina, each reported second-quarter profit that topped analysts’ estimates and raised their annual forecast.

Inflation Muted

Today’s report also showed price pressures remained contained. A measure of inflation, which is tied to consumer spending and strips out food and energy costs, rose at a 0.8 percent annualized pace. It was the weakest performance since the fourth quarter of 2010.

The lingering effect of fiscal tightening is forecast to wane this quarter and the next. The payroll tax had 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. About $85 billion in automatic across-the-board federal spending cuts, known as sequestration, started taking effect in March.

Consumers continue to spend on big-ticket items. Car and light truck sales are on track for the best year since 2007, figures from Ward’s Automotive Group show. Combined purchases of new and existing homes are the highest since 2009, according to data compiled by Bloomberg.

Federal Reserve officials were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to start reducing bond buying later this year if the economy improves, minutes of their July meeting showed.

Economic growth is projected at a 2.5 percent annualized pace in the second half of the year, according to the median forecast in a Bloomberg survey of economists this month.

There are also signs of improvement in overseas markets such as China, which is stabilizing after a two-quarter slowdown. The world’s second-biggest economy reported that industrial-profit growth rebounded in July, and industrial production was higher than forecast.