The Bureau of Economic Analysis (BEA) reported today the U.S. economy grew at an annual rate of 3.7 percent in the second quarter. This was higher than the 2.3 percent rate the BEA estimated last month, and the 3.2 percent experts had predicted. It is also much higher than the dismal 0.6 percent increase in the first quarter when winter storms slowed consumer spending. GDP expanded 2.2 percent in the first half of the year compared to 1.9 percent during the same period in 2014.
In its news release, the BEA said that today’s GDP estimate is based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, the increase in real GDP was 2.3 percent. In the second quarter numbers nonresidential fixed investment and private inventory investment increased. In the advance estimate last month, both of these components were expected to have decreased.
Strong consumer spending in the second quarter was largely responsible for the growth. Consumer spending accounts for more than two-thirds of U.S. economic activity. It grew 3.1 percent rather than the 2.9 percent reported last month. In addition, exports were up contributing to growth. State and local government spending, nonresidential fixed investment, residential fixed investment, and private inventory investment also contributed. Imports, which are a subtraction in the calculation of GDP, also increased due to consumer demand.
The upward revisions to second-quarter growth reflected $121.1 billion worth of inventories, $11.1 billion more than previously estimated. That meant inventories contributed 0.22 percentage point to GDP instead of subtracting 0.08 percentage point as reported last month. While the huge inventory build will likely weigh on growth in the third quarter, the blow could be softened by rebounding business investment in capital goods according to Reuters.
Another factor that could point to stronger growth is that oil prices are low. Although they rebounded slightly from Tuesday’s low of $38 a barrel, they are still low. Gas prices are, on average, $1 a gallon less than last year. Low gas prices will lead to more consumer spending, offsetting any decrease in oil and gas production.
The Labor Department reported that initial claims for state unemployment benefits this week slipped 6,000 to a seasonally adjusted 271,000 for the week ended Aug. 22. It was the 25th straight week that claims remained below the 300,000 threshold, which is usually associated with a strengthening labor market. This might mean that the August jobs numbers will be strong as well.
Another factor is the fact that corporate profits increased in quarter two. Profits of domestic financial corporations increased $33.9 billion in the second quarter, in contrast to a decrease of $23.4 billion in the first quarter. Profits of domestic nonfinancial corporations increased $16.5 billion in contrast to a decrease of $70.5 billion in quarter one.
The Commerce Department said investment in nonresidential structures increased 3.1 percent, reflecting stronger spending on commercial and healthcare construction. It was previously reported to have contracted at a 1.6 percent pace. Healthcare construction is increasing due to the fact more Americans have health insurance as a result of Obamacare and can pay their medical bills. Spending on residential construction was raised to a 7.8 percent pace from a 6.6 percent rate.
The spectacular GDP growth and other economic indicators could cause the Federal Reserve to raise interest’s rates at its fall meeting. In the midst of the market correction last week and earlier this week, speculation grew that the Fed might delay an interest rate hike. On Wednesday, New York Fed President William Dudley said that prospects of a September lift-off in the central bank’s key lending rate “seems less compelling to me than it was a few weeks ago.”
It is unlikely that Republican politicians will mention the GDP growth, and if they do it will be to say it should have been higher. One thing is certain, the gloom and doom predicted earlier this week during the stock market correction may not reflect the state of the economy as a whole. In contrast to China and other nations, our economic fundamentals seem to be solid. The economy may not be quite the disaster that Donald Trump and other candidates assert.