Economic Watch: Growth Accelerates in Second Quarter

The U.S. economy grew by leaps and bounds in the second quarter of the year compared to the first quarter, according to a new government estimate released Thursday, which should ease investors fears in the wake of a global stock market sell-off.

The gross domestic product, a measure of the total output of goods and services, grew at an annual rate of 3.7% in the April through June period. The Commerce Department said this compares to a first estimate a month ago of 2.3% annually and a final reading of a 0.6% annual increase in the first quarter of this year.

This latest reading is also the strongest pace of growth since the third quarter of 2014.

The increase in the GDP in the second quarter reflected positive contributions from personal consumption expenditures, exports, state and local government spending, nonresidential fixed investment, residential fixed investment and private inventory investment, according to the department. Imports, which are a subtraction in the calculation of GDP, increased.

During the second quarter consumer spending, which represents about two thirds of the economy, grew at a 3.1% annual rate, compared to 2.9% in the earlier estimate and 1.8% in the first quarter. Also, government spending increased 2.6% annually in the most recent quarter versus an 0.8% gain in the first quarter, the biggest increase by federal, state and local levels in five years.

“This morning’s report is a sizable step in the right direction, not only in terms of headline growth, but the composition of activity is much more favorable as well, albeit not quite as favorable as growth this time last year,” said Lindsey Piegza, chief economist at Stifel Fixed Income. “In the advanced report, consumer spending accounted for 2% of the 2.3% rise, suggesting very little activity was occurring outside of consumers ramping up purchases after a wintery first quarter kept them indoors. Now, according to the second-round release, there was much more activity occurring outside of the consumer sector in areas such as business investment and manufacturing, as well as trade.”

This news follows stock prices on Wall Street recovering somewhat on Wednesday with the Dow Jones Industrial Average posting its biggest daily point gain since 2008. This followed steep declines that began last week and continued through Tuesday amid fears China’s economy, the world’s second largest, is slowing more than its government has admitted.

In the wake of the new GDP numbers, the focus may now on the U.S. Federal Reserve and whether officials there will push for interest rate hikes that have been near zero percent for several years. From its perspective, some are asking is this GDP report enough to offset concerns over lingering weakness in the domestic economy and ongoing turmoil in the global market?

“Not necessarily,” Piegza said. “The Fed is still keeping an eye on the underlying conditions in the U.S. labor market which have yet to produce wage pressures. And, on the inflation front, with commodity prices still on a steep decline, the U.S. continues to import deflation creating an even more benign price scenario here at home.”

The bottom line, she said, despite a better than expected second quarter GDP report, the Federal Reserve’s dual mandate has yet to be met.

“Coupled with the recent events in the equity markets, the Fed has more than enough reason for pause,” she said. “Meaning, we still expect the Fed to remain on the sideline beyond the September meeting, with the case for a rate hike now less compelling.”