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U.S. Economy Grew at 1.7% Rate in 2nd Quarter, Faster Than Expected U.S. Economy Grew 1.7% During the 2nd Quarter, Topping Forecasts
(about 9 hours later)
The United States economy performed a bit better than expected in the second quarter, shrugging off some of the impact from higher taxes and lower federal spending in the spring, the government reported Wednesday. The American economy managed to stay on track last quarter, defying fears of another spring swoon, but doubts remain as to whether it will finally gain the kind of sustained momentum that has proved so elusive since the recovery began four years ago.
The gross domestic product grew at an annual rate of 1.7 percent, hardly indicative of an economic boom, let alone enough to bring down elevated levels of unemployment soon. It is also the third quarter in a row in which growth failed to top 2 percent, the average since the recession ended in 2009. The mixed picture facing the country was evident on Wednesday, as the Commerce Department reported that the economy, adjusted for inflation, expanded at a better-than-expected annual rate of 1.7 percent in the April-June quarter, even as inflation-adjusted growth in the first part of the year now appears slower than first thought. In a separate statement after a two-day meeting of policy makers at the Federal Reserve, the central bank said the economy was on a “modest” trajectory but gave no clue as to when it might start tapering back its huge stimulus efforts.
Still, the increase was an acceleration from growth in the first quarter of 2013, which was revised downward to 1.1 percent from an earlier estimate of 1.8 percent by the Bureau of Economic Analysis. Like economists and traders, as well as the 12 million unemployed Americans looking for work, the Fed is struggling to gauge whether better growth does indeed lie ahead.
“It was a reasonable performance,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “In the long run, it’s not enough, but I’ll take growth wherever I can get it.” Optimists point to improved levels of job creation in recent months, a more robust housing sector and a surging stock market that has lifted the value of investment and retirement accounts for millions of consumers. Pessimists focus on the fact that the estimated economic growth rate of about 1.4 percent so far in 2013 is well below last year’s levels of 2.8 percent, even as automatic cuts in federal spending and higher taxes continue to bite.
The economy’s trajectory is being closely watched by the Federal Reserve as it determines whether to ease its huge stimulus efforts. Fed policy makers will conclude a two-day meeting on Wednesday and issue their latest statement on the economy early Wednesday afternoon. There were pockets of strength in Wednesday’s data from the Bureau of Economic Analysis, all of which will be subject to further revision as the Commerce Department gathers more information about the economy. For example, residential fixed investment increased by 13.4 percent, a sign that housing continues to rebound. Personal consumption rose 1.8 percent, as consumers showed some resiliency, especially given the increase in payroll taxes at the beginning of 2013.
On Wall Street, stocks rose modestly as traders readied for the Fed announcement, watching closely for any change in the language of the statement that might indicate the central bank’s course. Additionally, government experts have introduced the first comprehensive change in four years in how the economy is measured. They revised figures all the way back to 1929, while also restating more recent data to show that the 2007-9 recession was slightly milder than originally estimated and growth in 2012 was a bit better.
Many economists had anticipated growth of below 1 percent in the second quarter, as automatic spending cuts imposed by Congress and higher taxes that went into effect this year began to bite. Still, economists emphasized that although the economy’s performance in the second quarter was significantly stronger than had been feared — Wall Street experts forecast growth would come in at just under 1 percent — big challenges remain.
Federal spending did decline by 1.5 percent in the second quarter, but the drop was not as severe as the falloff in government spending in earlier quarters. Exports rose 5.4 percent, reversing a decline in the first quarter. “The basic story of a deep recession followed by a lackluster recovery is essentially unchanged,” said Nariman Behravesh, chief economist at IHS. Growth in the current quarter, which wraps up at the end of next month, remains a wild card, he added. IHS and other companies do expect a pickup in the second half of 2013, but more fallout from the fiscal tightening in Washington could still be felt, he cautioned.
Most experts predict growth will pick up in the second half of 2013 as the drag from the federal spending cuts and higher taxes begins to fade. “So far the effects have been fairly muted,” Mr. Behravesh said. “We’re puzzling over that.”
“On balance it was a positive report showing a healthier economy than previously believed,” said Michelle Meyer, senior United States economist at Bank of America Merrill Lynch. “But growth has slowed in the past few quarters, reflecting fiscal tightening in Washington.” Were it not for the federal cuts, growth would have been close to 2 percent in both the first and second quarters, said Steve Blitz, chief economist at ITG Investment Research. But that’s about the best Americans can hope for, he said, at least in 2013.
The chairman of the Federal Reserve, Ben S. Bernanke, has hinted the Fed will soon begin winding down part of its extensive bond purchases aimed at stimulating the economy, but the timing is uncertain. “I don’t see the economy breaking away from that 2 percent rate for now,” Mr. Blitz said. He is more optimistic about 2014, when he said he thought the annual rate of growth could rise to about 3.5 percent. “The economy will have adjusted to the downshift in federal spending by then, and Europe won’t be decelerating as rapidly, nor will China and Japan,” he said.
On Wall Street, analysts and traders are speculating that the Fed could start tapering as early as September if the economy enjoys healthier growth and the job situation improves, or it could be delayed to December or beyond on evidence of weakness. The pace at which spending by the federal government is dropping stabilized last quarter. It fell by 1.5 percent, compared with an 8.4 percent decrease in the first quarter of 2013 and a 13.9 percent plunge in the final quarter of 2012.
While the Federal Reserve is not expected to announce a change in policy later in the day Wednesday, the economic data in the second quarter paints a more vigorous picture than anticipated and may increase the odds that the Fed will taper sooner rather than later. More clues about the economy’s performance will come on Friday, when the Labor Department reports on monthly job creation and the unemployment rate. Economists estimate the economy created 185,000 jobs in July, according to a Bloomberg survey, a bit below the 195,000 level in June, with the unemployment rate falling to 7.5 percent, from 7.6 percent.
Indeed, there were pockets of strength in Wednesday’s data from the Bureau of Economic Analysis. For example, residential fixed investment increased by 13.4 percent, a sign the housing sector continues to recover. Personal consumption rose 1.8 percent, as consumers showed some resiliency, especially given the increase in payroll taxes at the beginning of 2013. In a separate report on Wednesday, Automatic Data Processing reported that private sector employers added 200,000 jobs in July, a bit above what analysts had expected. While the A.D.P. report does not always align with the broader figures released by the Labor Department, the figure was interpreted as another positive sign. A.D.P. also increased its original estimate of the number of private sector jobs added in June to 198,000, from 188,000.
The reason government spending stabilized last quarter, rather than falling sharply, was that military spending flattened out, said Steve Blitz, an economist with ITG. One of the biggest economic puzzles this year is why job creation has been relatively healthy — the economy added an average of 202,000 jobs a month in the first half of 2013, consistent with an economic expansion of 2.5 percent to 3 percent — when the actual rate reported by the government was only half that.
After falling 21.6 percent in the final quarter of 2012, and another 11.2 percent in the first quarter of 2013, military spending last quarter barely budged, sinking just 0.5 percent. One factor that makes Mr. Blitz more optimistic about growth in 2014 “is the presumption that most of the military wind-down will have been completed.” One explanation is that the government has underestimated the true strength of the economy, and will revise it upward at some point in the future, much as the Bureau of Economic Analysis raised its estimate for growth in gross domestic product in 2012 to 2.8 percent, from 2.2 percent, on Wednesday.
Higher inventories, always a volatile component of economic reports, added 0.41 percentage point to overall growth. But analysts cautioned that inventory estimates were often adjusted as more data came in, raising the possibility that second-quarter growth could be revised downward in the future. The revisions also suggest that the recession, which lasted from the fourth quarter of 2007 to the second quarter of 2009, was slightly less damaging to overall output, even as the subsequent recovery was somewhat stronger. Based on the latest measures, inflation-adjusted output growth decreased at an annual rate of 2.9 percent during that time, instead of the previously reported 3.2 percent. The government frequently recalibrates its tools for measuring the economy. Wednesday signaled the first time the Bureau of Economic Analysis broke out a separate category for what it calls “intellectual property products,” which covers research and development; entertainment, literary and artistic originals; and software.
More clues about the economy’s performance will come on Friday when the Labor Department reports on monthly job creation and the unemployment rate. Economists estimate the economy created 185,000 jobs in July, according to a Bloomberg survey, a bit below the 195,000 level in June, with the unemployment rate falling to 7.5 percent, from 7.6 percent. Another possibility is that the uncertainty that held back job creation in the last few years has begun to fade, said Dean Maki, chief United States economist at Barclays. Shocks like the economic crisis in Europe as well as the federal debt standoff and credit downgrade in the United States have started to fade in the rearview mirror, he said, encouraging some employers to catch up in terms of hiring.
The latest data come as the government performed its first comprehensive revision in how the economy is measured since July 2009. “Our models tell us that when uncertainty spikes, job growth slows relative to growth in G.D.P.,” Mr. Maki said. “But uncertainty only delays activity, it doesn’t destroy it. Employers gradually add jobs back over time, and we think that’s what’s going on.”
As a result, the estimated growth in 2012 was actually healthier than originally thought. Last year’s annual rate of growth in economic output was revised upward to 2.8 percent, from 2.2 percent. The government also slightly adjusted the estimate of the severity of the recession from 2007-9, saying that the economy contracted at an annual rate of 2.9 percent, instead of 3.2 percent.
In a separate report on Wednesday, Automatic Data Processing reported that private sector employers added 200,000 jobs in July, a bit stronger than analysts had been expected. While the A.D.P. report doesn’t always align with the broader figures released by the Labor Department, the figure was interpreted as another positive sign.
ADP also increased its original estimate of the number of private sector jobs added in June to 198,000 from 188,000.
One puzzle for economists is why job creation has been healthier than economic growth would indicate. For example, the economy added an average of 183,000 jobs a month last year, a figure more consistent with 2.5 to 3 percent growth. But Maury Harris, chief United States economist at UBS, noted that the 2012 G.D.P. figures were revised upward, helping to explain the higher job creation numbers.