Good News on the US Economy

After two weeks of dismal financial reports out of China and Europe, there's news that should bring a smile to business folks everywhere; turns out things aren't so bad after all—in the US, anyway. The US economy looks much more vigorous in the second quarter than previously thought, as a report released Thursday showed businesses got off the sidelines and spent some money.

The acceleration in business investment, if it’s sustained, could add to the economy’s momentum in the months ahead. The data show why the Federal Reserve is considering hiking interest rates at its next meeting in September. The US economy grew at a faster 3.7% annual pace in the second quarter, up from the initial estimate of growth at a 2.3% clip, the Commerce Department said today.

Economists had predicted that GDP would be revised up to 3.3%, but business investment was stronger than expected. The government estimated last month that gross domestic product expanded at a seasonally adjusted 2.3% clip from April to June. As a result, US stocks, which have gyrated over the concerns about China’s economy, were rising on Thursday. 

Consumer spending, the main driver of US economic activity, led the way as usual. Outlays were revised up to 3.1% from 2.9% in the second quarter after a tepid 1.8% gain in the first three months of the year. What’s more, newly revised figures from the Commerce Department show that businesses invested at an even faster rate.
 

Businesses increased investment by 3.2% increase of a drop of 0.6%, with spending on structures such as office buildings rising by 3.1% instead of a drop of 1.6%. One reason businesses might have invested more: Corporate profits jumped an estimated 2.4% in the second quarter after declining by 5.8% in the first quarter. And they boosted spending on equipment by 10.7%, rather than 7%.
 

On the downside, economists aren't sure if the gains are sustainable. For instance, state and local government spending was boosted to 4.3% from 2.0%, the fastest pace since 2001. Furthermore, the value of inventories, which adds to GDP, increased by $121.1 billion in the second quarter instead of a previously estimated $110.0 billion. This is expected to subtract from growth in the third and fourth quarter. But real final sales to private domestic purchasers, a measure of activity without inventories, saw a stronger upward gain than many economists expected, from 2.5% to 3.3%.


Looking ahead, economists forecast the US will grow at a 2.8% pace in the July-September quarter. But that was before this week’s financial market volatility. Inflation as measured by the PCE price index rose at a 2.2% annual rate.
 

What's more William Dudley, the president of the New York Fed, noted that recent financial market turmoil has complicated the US central bank’s plans. Dudley told reporters the steep market declines had made a rate increase “less compelling.”