Economy Watch: GDP Surges in Q2

By Dees Stribling, Contributing Editor

U.S. real gross domestic product increased at an annualized rate of 4 percent in the second quarter of 2014, according to the first (“advance”) estimate released by the Bureau of Economic Analysis on Wednesday. That was more than expected—economists predicted no more than 3 percent—and a vigorous turnaround from the first quarter, when real GDP decreased 2.1 percent, though the Q2 figure will be revised twice in the coming weeks.

The increase in real GDP in Q2 was spurred by personal consumption expenditures —people out spending, which the government calls PCE (private inventory investment), businesses spending, as well as exports, nonresidential fixed investment, state and local government spending and residential fixed investment. Almost all kinds of contributions to GDP increased, in other words, except for imports, which are a subtraction from GDP. Imports increased during the quarter.

Real PCE increased 2.5 percent in the second quarter, compared with an increase of 1.2 percent in the first, with durable goods spiking 14 percent, compared with a 3.2 percent rise in Q1. Nondurable goods spending increased 2.5 percent, while it was flat in the first quarter. Service spending increased 0.7 percent in the second quarter, versus an increase of 1.3 percent in the Q1.

More tapering by the Fed

The Federal Open Market Committee said on Wednesday that its tapering of QE3 is going to continue. Money quote from the central bank’s statement (quite literally): “Beginning in August, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $10 billion per month rather than $15 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $15 billion per month rather than $20 billion per month.”

Growth in economic activity rebounded in the second quarter, the central bank said (and if the GDP estimates hold up under revision, that’s a correct assessment). “Labor market conditions improved, with the unemployment rate declining further,” the FOMC notes, but added a caveat or two: “However, a range of labor market indicators suggests that there remains significant underutilization of labor resources.” People still need jobs.

But on the whole, the economy’s getting better. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, but not as much as it used to. “Inflation has moved somewhat closer to the Committee’s longer-run objective,” the Fed adds. “Longer-term inflation expectations have remained stable… the likelihood of inflation running persistently below 2 percent has diminished somewhat.” Deflation isn’t much of a danger, that is.

ADP says 218K jobs added in July

Private-sector employment increased by 218,000 jobs month-over-month in June, according to the July ADP National Employment Report, which the company released on Wednesday. The report, derived from ADP’s payroll data, measures the change in total private employment each month, but doesn’t always jibe with official Bureau of Labor Statistics employment numbers, which will be released on Friday.

“The July employment gain was softer than June, but remains consistent with a steadily improving job market,” Moody’s Analytics chief economist Mark Zandi notes (Moody’s collaborates with ADP on the report). “At the current pace of job growth unemployment will quickly decline. Layoffs are still receding and hiring and job openings are picking up. If current trends continue, the economy will return to full employment by late 2016.”

Wall Street pretty much shrugged on Wednesday, ending the day mixed. The Dow Jones Industrial Average lost 31.75 points, or 0.19 percent. The S&P 500 and the Nasdaq were up 0.01 percent and 0.45 percent, respectively.