US GDP growth beats forecasts; may boost case for Fed move

Monday, 2 September 2013 00:00 -     - {{hitsCtrl.values.hits}}

Reuters: The US economy accelerated sharply in the second quarter thanks to a surge in exports, bolstering the case for the Federal Reserve to wind down a major economic stimulus program. Other economic data on Thursday showed the number of Americans filing new claims for jobless benefits fell last week, a potential sign of faster hiring in August. US gross domestic product grew at a 2.5% annual rate in the April-June period, according to revised estimates released by the Commerce Department. That was more than double the pace clocked in the prior three months. The reports could boost confidence that the economy is turning a corner, shaking off the government austerity enacted earlier in the year when Washington hiked tax rates and slashed the federal budget. “We are likely now moving past the peak of fiscal drag and, as we do, improving underlying private demand should support a pickup in GDP growth,” said Ted Wieseman, an economist at Morgan Stanley in New York. The government had initially estimated that GDP expanded at a 1.7% rate in the second quarter. But recent data showed that exports climbed during the period at their fastest pace in more than two years. Economists polled by Reuters had forecast the economy growing at a 2.2% pace. Many economists expect the economy will accelerate further in the second half of the year as austerity measures begin to weigh less on national output. That drag was evident in the second quarter, when spending contracted at all levels of government. Indeed, Thursday’s data showed the economic drag from spending cuts was greater in the second quarter than initially estimated. Still, the data could make officials at the US central bank more confident in their plan to begin reducing monthly bond purchases later this year. “The upward revision today does help cement the decision to start tapering,” said Stuart Hoffman, an economist at PNC Financial in Pittsburgh. Stock prices rose, as did yields on US Government debt, while the dollar strengthened against the euro. The Fed’s program has reduced borrowing costs and helped spark a recovery in the nation’s housing market, which collapsed during the 2007-09 recession. In the second quarter, investments in housing accounted for nearly a fifth of the economy’s growth during the period. However, other reports have suggested that housing began to look more shaky toward the end of the quarter. Expectations that the Fed could trim its $85 billion in monthly bond purchases as early as September have driven mortgage rates sharply higher since May. The bond-buying program is one of the United States’ last major economic stimulus programs, as government spending began to drag on GDP in late 2010. In the second quarter, higher taxes appeared to hold consumers back. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, slowed to a 1.8% growth pace after rising at a 2.3% rate in the first quarter. Corporate profits, however, unexpectedly climbed in the second quarter, posting their fastest after-tax gain since late 2011. The report leaves the annual economic growth rate averaging 1.8% in the first half of the year, making it more plausible that GDP could expand this year as much as the Fed forecasts. Its forecasts in June were for economic growth of at least 2.3% in 2013. Still, some of the strength in the second quarter could dull growth in the third quarter. Part of the upward revision was due to retailers restocking their shelves at a faster pace than originally estimated, so they may face less of a need to build inventories between July and September. “Inventories might be more of a headwind to (third-quarter) growth than we had been anticipating,” said Daniel Silver, an economist at JPMorgan in New York. A separate report from the Labour Department showed the number of Americans filing new claims for unemployment benefits slipped 6,000 last week to 331,000. Claims have not strayed too far from the 330,000 level since mid-July, bolstering expectations of an acceleration in the pace of employment gains in August.