US economy gains pace in Q2

A supervisor checks a vehicle on the assembly line at a car plant in Detroit. Consumer spending slowed to a 1.8 per cent growth pace after rising at a 2.3 per cent rate in the first quarter. — AP

Gross domestic product grew at a 1.7 per cent annual rate, the Commerce Department said on Wednesday, stepping up from the first-quarter’s downwardly revised 1.1 per cent expansion pace.

Economists polled by Reuters had forecast the economy growing at a one per cent pace after a previously reported 1.8 per cent advance in the first three months of the year.

A separate report showed private employers maintained a higher pace of hiring in July, adding to the brightening economic picture.

A rebound in business spending, export growth and a sharp moderation in the pace of decline in government outlays boosted economic growth in the April-June period, offsetting a slowdown in consumer spending and a steady rate of inventory accumulation.

Still, the report marked a third straight quarter of GDP growth below two per cent, a pace that normally would be too soft to bring down unemployment. But growth was poised to gain even more momentum in the second half of the year as the fiscal burden brought on by belt-tightening in Washington eases.

Federal Reserve officials, wrestling with a decision on the future of their $85 billion per month bond-buying program, will draw comfort from the pick-up in output last quarter. They wind up a two-day meeting later on Wednesday.

The government has implemented some changes in how it calculates GDP. For example, research and development spending will now be treated as investment, and defined benefit pension plans will be measured on an accrual basis, rather than as cash. Economic growth was relatively stronger between 2009 and 2012 than previously reported. In fact, the economy grew 2.8 per cent last year, 0.6 percentage point faster than the government had previously estimated.

The revisions also yielded a higher rate of savings, a good omen for consumer spending in the future. Higher taxes, as Washington tries to shrink the government’s budget deficit, constrained consumer spending in the second quarter, keeping the economy on an anemic growth pace.

Consumer spending, which accounts for more than two-thirds of US economic activity, slowed to a 1.8 per cent growth pace after rising at a 2.3 per cent rate in the first quarter. The slow pace of consumption kept a lid on inflation pressures, with the personal consumption expenditures price index unchanged in the second quarter. Excluding food and energy, prices rose 0.8 per cent. Both measures were the weakest since the first quarter of 2009.

But higher savings and a firming labor market should help to spur consumer spending. Businesses added 200,000 jobs to their payrolls in July, the ADP National Employment Report showed, after hiring 198,000 workers in June.

Tepid domestic demand saw businesses keeping their inventories from bulging in the second quarter. Inventory accumulation added 0.41 per centage point to growth, less than half its contribution in the prior quarter.

Other details of the report showed exports rebounded, showing the largest percentage gain since the third quarter of 2011, even as demand weakened in Europe and China. But the increase was not enough to offset a rise in imports, leaving a trade deficit that weighed on growth. There was good news from the housing sector, with double-digit growth for spending on residential construction.

Business spending on equipment and software reversed the prior quarter’s decline, lifted by a turnaround in investment in nonresidential structures and gains in outlays on equipment and intellectual products.