U.S. second-quarter growth exceeds prior estimate

The economy expanded more than previously estimated in the second quarter, reflecting gains in consumer spending and exports that are being threatened by costlier gasoline and a global slowdown.

Gross domestic product climbed at a 1.7% annual rate from April through June, up from an initial estimate of 1.5% and following a 2% gain in the first three months of the year, revised Commerce Department figures showed today (Aug. 29) in Washington. The weakest gain in business investment in new equipment in almost three years restrained the pace of growth, which was the slowest since the third quarter.

Consumers and companies may continue to curb spending in the second half of the year as rising fuel costs, unemployment and the prospect of tax changes and government budget cuts hurt confidence. Fed Chairman Ben Bernanke this week may reaffirm the view of many Federal Reserve policy makers that more stimulus will be needed unless the expansion shows signs of strengthening.

“We are very much struck in a slow-growth mode,” said Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, N.C., who correctly forecast the revision. “We still don’t see the economy breaking free of this 1.5 percent to 2 percent growth rate. A 1.7 percent pace is the personification of the Fed’s frustration.”

Another report showed Americans signed more contracts to purchase previously owned homes in July, a sign housing will keep strengthening in the second half.

The index of pending home resales climbed 2.4%, exceeding the 1% gain median forecast of 39 economists surveyed by Bloomberg, figures from the National Association of Realtors showed. The gauge rose to 101.7, the highest since April 2010.

Stocks climbed, halting a two-day drop, as investors awaited Bernanke’s speech in two days. The Standard & Poor’s 500 Index rose 0.1% to 1,410.49 at the close in New York.

Second-quarter growth forecasts from the 80 economists surveyed by Bloomberg ranged from 1.2% to 2.2%. The economy expanded 4.1% in the fourth quarter.

CONSUMER MOVES
U.S. consumer purchases, about 70% of the economy, climbed at a 1.7% annual rate, the weakest in a year and revised from a 1.5% initial estimate. The revision reflected the biggest gain in outlays on services since the fourth quarter of 2006. The largest contributor came from electricity and gas as temperatures across the country approached record highs.

Higher gasoline prices may further restrain households. The average cost of a gallon climbed to $3.80 yesterday, up 47 cents from the year’s low on July 1, according to AAA, the nation’s largest motoring organization.

Disposable income adjusted for inflation rose 3.1% from April through June after a 3.7% gain in the first quarter. The saving rate in that period climbed to 4% from 3.6% in January through March.

Wages and salaries from April through June rose by $56.1 billion after a revised $133.5 billion first-quarter gain that was bigger than the previous estimate of $123.3 billion.

INVESTMENT, PAYROLL DATA
Today’s report showed international trade held up, indicating weaker global economies had yet to slow demand for goods produced in the U.S. Net exports, which initially subtracted from second-quarter growth, contributed 0.32 percentage point to GDP.

On the business side, today’s report offered a first look at corporate profits. Before-tax earnings rose 0.5%, after falling 2.7% in the prior period. They climbed 6.1% from the same time last year.

Investment by businesses slowed last quarter. Corporate spending on equipment and software rose at a 4.7% pace, the weakest since the third quarter of 2009. The second-quarter pace was less than the previously estimated 7.2% rate and compared with a 5.4% increase in the previous quarter.

A smaller gain in inventories subtracted 0.2 percentage point from growth last quarter, rather than contributing 0.3 percentage point as previously reported.

Stronger economic growth may prove difficult without faster employment gains at the same time gasoline prices rise and uncertainty over fiscal policy restrains business investment.

Payroll increases averaged 73,000 in the second quarter, down from 226,000 in the prior three months. While the pace of hiring picked up in July, the unemployment rate rose to 8.3% and has exceeded 8% for 42 straight months.

FED NOTES
Fed Chairman Bernanke may use this week’s speech in Jackson Hole, Wyo., to reaffirm the central bank’s assessment of the expansion. Policy makers have said they are prepared to provide new stimulus “fairly soon” unless they’re convinced the economy is poised to rebound, according to the minutes of the Federal Open Market Committee’s July 31-Aug. 1 meeting released last week.

Bernanke sees “scope for further action,” he wrote in an Aug. 22 letter to California Republican Darrell Issa, chairman of the House Oversight and Government Reform Committee.

Inflation is still near the central bank’s goal of 2%. Today’s report showed a measure of prices excluding food and energy costs tied to consumer spending climbed at a 1.8% annual pace in the second quarter.

At the same time, monetary authorities won’t be able to avert the blows to growth the economy could receive at the start of next year from changes in fiscal policy. More than $600 billion in higher taxes and reductions in defense and other government programs next year, dubbed the fiscal cliff, will occur automatically without action by U.S. lawmakers.

Gross domestic income in the second quarter was also released today for the first time. The measure, which shows the money earned by the people, businesses and government agencies whose purchases go into calculating growth, rose at a 0.6% annual rate from April through June after a 3.8% gain. GDI may be a better gauge of the economy, according to Fed research.