Business spending, exports spur big bounce in U.S. economy

By Reuters

Sep 27, 2014 05:59 AM EDT

The U.S. economy grew at its fastest pace in 2-1/2 years in the second quarter with all sectors contributing to the jump in output in a bullish signal for the remainder of the year.

The Commerce Department on Friday raised its estimate of growth in gross domestic product to a 4.6 percent annual rate from the 4.2 percent pace reported last month.

"It increases our confidence that strong growth is obtainable in the second half of this year," said Chris Rupkey, chief financial economist at MUFG Union Bank in New York.

The United States is bucking a spate of weaker overseas growth with the euro zone and Japan slumping, and growth in China slowing as well.

With the U.S. economy firing on nearly all cylinders, traders are bracing for an interest rate hike from the Federal Reserve next year. The dollar .DXY, which got a lift from the GDP data, has risen about 7 percent against a basket of major currencies since early July in anticipation.

The data also supported stocks, which were up marginally near midday, while prices for U.S. Treasury debt fell.

A faster pace of business spending and sturdier export growth than previously estimated were the two main factors behind the upward revision to U.S. GDP, which had its best growth performance since the fourth quarter of 2011.

Consumer spending growth was unrevised at a 2.5 percent rate as stronger healthcare outlays were offset by weakness in spending on recreation, other services and durable goods.

Household spending, however, is likely to accelerate, with another report on Friday showing consumer sentiment hitting a 14-month high in September.


But the expansion in consumer spending, combined with strong business investment, was nevertheless enough to push domestic demand ahead at its fastest pace since 2010.

That suggests the economy's recovery is becoming more durable after output slumped at a 2.1 percent rate in the first quarter because of an unusually cold winter.

So far, data covering manufacturing, trade and housing suggest that much of the second quarter's momentum spilled over into the third quarter. Growth estimates for the July-September quarter range as high as a 3.5 percent pace.

When measured from the income side, the economy grew at a 5.2 percent pace during the second quarter, while corporate profits rose at their fastest pace in three years.

Business spending on equipment was raised to an 11.2 percent pace from a previously reported 10.7 percent rate. Businesses also invested more in nonresidential structures, such as gas drilling, as well as in research and development.

The trend likely persisted in the third quarter, with data on Thursday showing business orders for capital goods rose in August.

Though trade was a drag for a second consecutive quarter, export growth was raised to an 11.1 percent pace, the fastest since the fourth quarter of 2010, from a 10.1 percent rate.

The dollar's strength, however, could take some of the edge off of export growth in the months ahead.

"The recent appreciation in the dollar will continue and slow export growth in 2015 by driving relative prices for U.S. exports higher," said Doug Handler, chief economist at IHS Global Insight in Lexington, Massachusetts.

Businesses accumulated $84.8 billion worth of inventory in the second quarter, contributing 1.42 percentage points to GDP growth. The relatively strong pace could result in inventories making no contribution to growth in the third quarter.

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