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U.S. Q2 growth revised up, Fed still seen in play

unitedstates
Tags: U.S. GDP
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The U.S. economy fared slightly better than initially thought in the second quarter but the pace of growth remained too slow to shut the door on further monetary easing from the Federal Reserve.

Gross domestic product expanded at a 1.7-percent annual rate, the Commerce Department said on Wednesday, as stronger export growth offset a pull-back in restocking by businesses wary of sluggish domestic demand.

That was up from the government's initial estimate of 1.5-percent growth released last month and in line with economists' expectations. The economy grew at a 2.0-percent pace in the January-March period.

A second report showed contracts to buy previously owned homes in July rose to their highest level since April 2010, suggesting the housing market recovery was gaining traction.

While the composition of economic activity was fairly favorable, growth remains well below the 2 to 2.5-percent rate required every quarter to hold the unemployment rate steady, which could compel policymakers at the U.S. central bank to offer additional stimulus at their Sept. 12-13 meeting.

"It shows slightly better government spending and consumer spending but overall the data suggest the economy stays in slow growth mode and is not likely to change," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.

"This certainly strengthens the hand of the Fed to aid the economy."

Speculation the Fed would loosen policy further had been dampened by a pick-up in job growth and a rebound in retail sales in July but other data on business spending and inflation supported more action.

Fed Chairman Ben Bernanke could offer more clarity on the near-term outlook for monetary policy when he gives a speech at the Kansas City Fed's high-profile gathering in Jackson Hole, Wyoming at the end of the week.

The jobless rate rose to 8.3 percent in July from 8.2 percent the prior month. The weak economy could be a stumbling block to President Barack Obama's quest for a second term in November elections.

EXPORTS UP, INVENTORIES RETREAT

Second-quarter economic growth was revised up to show strong export growth, despite slowing global demand. Import growth was the smallest in a year. Trade contributed 0.32 percentage point to GDP growth instead of subtracting a third of a percentage point, as previously reported.

That helped to offset the drag from inventories. Business inventories increased $49.9 billion US instead of $66.3 billion and subtracted 0.23 percentage point from GDP growth in the April-June period. However, the careful management of stocks can be a boost to the economy in the third quarter.

Excluding inventories, GDP rose at a 2.0-percent rate rather than 1.2 percent. In the first quarter, final sales of goods and services produced in the United States increased at a 2.4-percent pace.

There were also upward revisions to growth in consumer spending, which was bumped up to a 1.7-percent pace from the previously reported 1.5 percent. That was a step-down from the 2.4-percent pace recorded in the first quarter, however.

The revision to consumer spending was to account for stronger growth in services than previously thought.

Investment in construction of nonresidential structures was stronger than previously reported. But growth in business investment in equipment and software was lowered to a 4.7-percent pace, the slowest since the third quarter of 2009, from 7.2 percent previously.

Growth in spending by businesses on equipment and software has slowed sharply from a peak of 18.3 percent in the third quarter of last year.

That appears to have intensified early this quarter, with a measure of business spending plans falling sharply in July. The pullback likely reflects worries of deep government spending cuts and higher taxes scheduled to kick in at the start of 2013, as well as troubles from the debt crisis in Europe.

"There's no question that as we look toward the end of the year and the risk presented by federal spending cuts and tax increases, the economy remains in a vulnerable window," said Jim Baird, chief investment strategist at Plante Moran Financial Advisors in Kalamazoo, Michigan.

The report also showed that after-tax corporate profits rose at a 1.1-percent rate after sinking 8.6 percent in the first quarter.

Growth in spending on homebuilding was cut to an 8.9-percent rate from 9.7 percent. Still, the housing market is on a rebound, with home construction, sales and prices firming in recent months.

"While the level of housing activity remains depressed, housing has turned the corner," said Fred Dickson, chief market strategist at D.A. Davidson & Co in Lake Oswego, Oregon.

Although government spending declined in the second quarter, the drop was not as deep as previously reported. Defense outlays fell at a 0.1 percent rate instead of 0.4 percent.

Despite consumer spending being bumped up, inflation pressures remained muted in the second quarter.

A price index for personal spending rose at an unrevised 0.7-percent rate, the slowest pace since the second quarter of 2010. It rose 2.5 percent in the first quarter.

A core measure that strips out food and energy costs advanced at an unrevised 1.8-percent pace, slowing down from 2.2 percent in the prior quarter.

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