The economy’s second quarter went from solid to stellar
Washington — The U.S. economy staged a far bigger rebound last quarter than first thought, outpacing the rest of the developed world and bolstering confidence that it will remain sturdy in coming months despite global headwinds.
The economy as measured by gross domestic product expanded at an annual rate of 3.7 percent in the April-June quarter, the Commerce Department reported Thursday. That’s more than a percentage point greater than the initial 2.3 percent estimate and a sharp upgrade from the anemic 0.6 percent advance during the January-March quarter.
To be sure, the GDP report provides a backward look at the U.S. economy. Since the spring, it has been hit with deepening concerns about a slowdown in China and recent turbulence in global financial markets. It remains unclear how the U.S. will fare in the months ahead if developments abroad deteriorate.
The robust second-quarter numbers, however, indicate a level of growth unmatched by the rest of the developed world and a solid footing heading into the second half of the year.
“The U.S. economy entered the current market turbulence with momentum, which will help it to shrug off the drag from China and other developing economies,” said Diane Swonk, chief economist at Mesirow Financial.
In contrast, Japan — the world’s No. 3 economy — shrank at an annual pace of 1.6 percent in the second quarter. Germany eked out 0.4 percent growth, while the United Kingdom expanded at a modest 0.7 percent rate. France didn’t grow at all.
The U.S. economy will probably cool slightly in the third quarter, but economists still expect solid growth that should keep fueling jobs and spending.
Paul Ashworth, chief U.S. economist at Capital Economics, projects GDP growth of 2.5 percent in the current July-September quarter.
“The economy regained a massive amount of momentum in the second quarter and all the evidence from July’s activity and employment data suggests that momentum continued into the third quarter,” Ashworth said in a note to clients.
Mark Zandi, chief economist at Moody’s Analytics, is forecasting the economy to grow around 2.8 percent in third quarter and accelerate to a 3.5 percent annual rate in the October-December period. But he said that is based on an expectation that the recent market turbulence will not inflict long-lasting damage on the economy.
“My forecast rests on the assumption that this is a garden variety market correction, with stock prices dropping by 10 percent from their recent high,” Zandi said. “If we get a bigger decline of 20 percent, then that will hurt consumption and housing, and we will not get the job growth we are expecting.”
The revision for second-quarter growth was broad-based, reflecting more robust spending by consumers, businesses and government.
Consumer spending grew at annual rate of 3.1 percent, up from a 1.8 percent growth rate in the first quarter.
Business investment in structures and equipment was revised higher to show growth of 3.2 percent instead of a decline. Housing construction jumped 7.8 percent, up from an initial estimate of 6.6 percent growth. Businesses spent more to restock their store shelves as well.
Also fueling growth were strong gains in state and local government spending, largely due to greater public construction outlays.
Before the recent financial market turmoil, many economists had assumed that signs of an improving U.S. economy would lead the Fed to begin raising its key short-term rate at its Sept. 16-17 meeting. Now many analysts say a September rate hike is probably off the table, at least for now.
“With the economy gaining strength… and labor markets marking further progress, the Fed should feel “compelled” to raise interest rates this year,” said Sal Guatieri, senior economist at BMO Capital Markets. “Whether it moves in September will largely hinge on whether global financial markets settle down in the weeks ahead.”