U.S. Economy Grew at Brisk Rate in Second Quarter

Posted by Unknown on Thursday, August 28, 2014

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Business Day |U.S. Economy Grew at Brisk Rate in Second Quarter

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The United States economy grew faster than first thought last quarter, the Commerce Department said on Thursday, the latest in a series of signals that suggest growth is picking up.

Increased investment by businesses and a slightly improved trade picture prompted the revision, which lifted the estimated annual rate of growth in April, May and June to 4.2 percent from the governmentâ€™s initial reading of 4 percent in late July.

Since the economy emerged from the Great Recession five years ago, companies have been hesitant to spend heavily on new capacity, but these figures and other recent data indicate that is finally changing.

â€œNot only was there an upward revision, but the composition points to solid growth in the second half of this year,â€ said Stuart G. Hoffman, chief economist at the PNC Financial Services Group in Pittsburgh. â€œBusinesses have bounced back after the bad winter disrupted production and demand.â€

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In a separate report on Thursday, the Labor Department said initial claims for unemployment benefits dropped last week by 1,000, to 298,000, helping push the eight-week average for new claims to below 300,000 for the first time since April 2006, well before the onset of the recession.

Despite the faster overall growth rate, however, businesses still seem to be benefiting more from the economyâ€™s upward trajectory than many individual consumers.

Thursdayâ€™s revision, for example, lowered the estimate of workersâ€™ wage and salary growth slightly in the first half of 2014, with income rising 5.8 percent in the second quarter. Corporate profits, on the other hand, jumped 8 percent in the second quarter, the Commerce Department said.

That split could change if unemployment continues to drop, and the labor market tightens enough to give employees more bargaining power to demand higher pay. Although the unemployment rate has fallen to 6.2 percent from 8.2 percent two years ago, broader measures of joblessness remain much higher, meaning that, for now, there is little incentive for employers to substantially raise wages to retain and attract workers.

Economists expect the unemployment rate to fall below 6 percent by the end of 2014, and Janet L. Yellen, the chairwoman of the Federal Reserve, will be closely watching the data on employment, wages and inflation to determine when to start raising interest rates next year, said Doug Gordon, senior investment strategist, North America, at Russell Investments in Seattle.

So far, inflationary pressures remain muted, and Mr. Gordon and most other market observers do not expect the Fed to increase rates from their level close to zero until the middle of 2015.

One conundrum, he said, is that even as the economy builds momentum, the yield on the benchmark 10-year Treasury bond has been falling, the opposite of what usually happens to bond yields when growth picks up.

In part, Mr. Gordon attributed this trend to increased demand for Treasury bonds as a safe harbor amid rising tensions in Ukraine, and very weak economic growth across Europe, where rates are even lower than in the United States. In addition, he said, pension funds and institutional investors who have enjoyed big stock market gains in 2013 and 2014 may be â€œde-riskingâ€ and buying Treasury securities to diversify their holdings.

In midday trading on Wall Street, stocks were down modestly, while 10-year bond yields fell to just above 2.30 percent, the lowest level this year.

One clue as to how substantial the economic rebound will be for the rest of the year will come Friday, when the Commerce Department reports data on personal income and spending for July. On Tuesday, the Commerce Department reported a strong reading for durable goods orders in July.

Separately, the National Association of Realtors said on Thursday that its index of pending home sales rose 3.3 percent in June, a stronger gain than many economists had expected.

In terms of Thursdayâ€™s report on gross domestic product, the estimate of final sales in the second quarter was revised upward, to 2.8 percent from an initial reading of 2.3 percent, while inventory gains were revised slightly downward.

â€œInvestment spending by businesses tends to follow activity, so this is a sign that good demand in the second quarter will be followed by stronger business investment in the third and fourth quarters,â€ said Michael Gapen, senior United States economist at Barclays.