Economy GDP
Seth Perlman/AP
By Lucia Mutikani

WASHINGTON -- The U.S. economy rebounded sharply in the second quarter as consumers stepped up spending and businesses restocked, putting it on course to close out the year on solid footing.

Gross domestic product expanded at a 4 percent annual rate after shrinking at a revised 2.1 percent pace in the first quarter, the Commerce Department said Wednesday.

Previously, the government had said the economy contracted at a 2.9 percent rate at the start of the year. The second quarter's expansion was much stronger than the 3 percent economists had expected and bolstered the outlook for the remainder of the year.

"The economy came back and even though there may have been a little extra inventory building ... solid activity was so widespread that you cannot call this number an aberration," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

Despite the pickup, growth in the first half of the year badly lagged the economy's estimated 2 percent to 2.5 percent potential, a reminder that the nation's recovery from the worst recession since the 1930s remains the slowest on record.

A separate report showed private employers added 218,000 jobs to their payrolls this month, a decline from June's hefty gain of 281,000. Still, hiring remains solid and consistent with expectations for a stronger second half of the year.

U.S. stocks initially rose on the growth data before faltering, while the dollar hit a 10-month high against a basket of currencies.

Prices for U.S. Treasury debt fell, with the yield on the two-year note touching its highest level since 2011 as traders speculated about an early interest rate increase from the Federal Reserve.

Eyes on the Fed

The GDP data was released only hours before Fed officials were to end a two-day policy meeting.

The U.S. central bank is expected to announce further reductions to the amount of money it is injecting into the economy through monthly bond purchases, but it is not expected to raise rates until June of next year.

"We do not feel the report calls for pulling forward the Fed rate hike. The first quarter's bad weather didn't change the story, but simply delayed when that train gets to the station," said Tim Hopper, chief economist at TIAA-CREF in New York.

The government also published revisions to prior GDP data going back to 1999, which showed the economy performing much stronger in the second half of 2013 and for that year as a whole than previously reported.

The economy in the second quarter was buoyed by consumer spending and a swing in business inventories.

Consumer spending growth, which accounts for more than two-thirds of U.S. economic activity, accelerated at a 2.5 percent pace, as Americans bought long-lasting manufactured goods, mostly automobiles, and spent a bit more on services.

It had braked to a 1.2 percent pace in the first quarter because of weak healthcare spending.

Despite the pick-up in consumer spending, Americans saved more in the second quarter. The saving rate increased to 5.3 percent from 4.9 percent in the first quarter as incomes rose, which bodes well for future spending.

Inventories contributed 1.66 percentage points to GDP growth after chopping off 1.16 points in the first quarter.

The economy also received a boost from business investment, government spending and investment in home building.

Trade, however, was a drag for a second consecutive quarter as some of the increase in domestic demand was met by a surge in imports. Domestic demand rose at its fastest since the third quarter of 2011.

Solid domestic demand, which underscores the economy's firming fundamentals, led to some pick-up in price pressures in the second quarter, a welcome development for Fed officials who have long worried about inflation being too low.

A price index in the report rose at a 2.3 percent rate in the second quarter, the quickest in three years, after advancing at a 1.4 percent pace in the prior period.

A core price measure that strips out food and energy costs increased at a 2 percent pace, the fastest since the first quarter of 2012.

The Fed targets 2 percent inflation.

"The inflation picture should lend support to the Fed hawks who want to hike interest rates sooner rather than later," said Sung Won Sohn, an economics professor at California State University Channel Islands in Camarillo.

-Additional reporting by Richard Leong in New York.


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6 Comments

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Valerie

Oh, yeah, the economy is just great. Families are living day-to-day, from one check to the next, in fear of that big unexpected expense that will sink their financial boat.

The only selling that is increasing is neighborhood yard and garage sales, at which people are trying to sell everything except the shirt off their back. RV's, boats, motorcycles, ATV's and late model cars are for sale all over town --- their owners are frantically trying to sell these "big toys" before they are repossessed because of late finance payments due. Neighborhoods are dotted with For Sale by Owner signs in front of those overpriced homes that people just HAD to have to chase the American Dream.

Throw in millions of unemployed and/or underemployed people working mini wage jobs. Nearly every city in America is filled with homeless people --- many in tent cities or living in their cars. Food banks can't keep up with the demand. Neither can churches, which are teaming up to offer free meals for hungry people.

Yeah, things are just wonderful. If they get any better, we might not be able to stand it. The American Dream has deteriorated into the American Nightmare.

July 31 2014 at 10:53 AM Report abuse +2 rate up rate down Reply
ipdhome

This is great news! I look forward to the next 904 days of the Obama presidency just like the first 2016 days. We can now look forward to the future with great anticipation and most importantly, results. It is now expected, that the US economy will "roar ahead" spreading most wanted life into a moribund "Bush" legacy. The President and the most intelligent Vice President ever; Joe Biden, should stand up proud and take that needed bow. And just think how it would have been in the "no good for nothing" Republican congress would have continued the first 2 years of the Obama administration when spending was a natural extension of the Bush Depression. We would be so much better if we were 22 trillion dollars in debt and Nancy Pelosy would be in charge of Congress. Oh those damn Republicans, shame on you. Let's hope the numbers aren't revised down because I need this euphoria to continue, for at least the next 904 days and counting.

July 30 2014 at 2:12 PM Report abuse -2 rate up rate down Reply
whstokey

This is a sugar high. With the deficit spending by the Federal Government, increased regulations (cost) and the increase in the Federal Reserves holding it's shocking that we don't have more inflation. Apparently the private sector has been able to do it's job in spite of all the negatives.

July 30 2014 at 11:47 AM Report abuse +3 rate up rate down Reply
rgkarasiewicz

Yeah, and the revised GDP version will no doubt show a 4% annual rate decline.

July 30 2014 at 10:50 AM Report abuse +3 rate up rate down Reply
dseel1

I will wait for the revised movie version.

July 30 2014 at 9:44 AM Report abuse +3 rate up rate down Reply
createidea

"U.S. Economy Roars Back to Life in Second Quarter"....

LOL !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Yeah, right.

July 30 2014 at 9:38 AM Report abuse +6 rate up rate down Reply