The U.S. economy has rebounded with vigor from a grim start to 2014 and should show renewed strength into next year.
That was the general view of analysts Wednesday after the government estimated that the economy grew at a 4 percent annual rate in the April-June quarter. Consumers, businesses and governments joined to fuel the second-quarter expansion. The government also said growth was more robust last year than it had previously estimated.
Whether the healthier expansion will lead the Federal Reserve to raise interest rates sooner than expected is unclear. The Fed, in a statement after its two-day meeting Wednesday, said it would continue to trim the size of its bond-buying stimulus. But the central bank left its key short-term interest rate near zero and gave no indication that it was about to change course anytime soon.
Stock prices turned generally negative in the wake of the GDP report because some investors saw a greater likelihood that the Fed would raise rates sooner than expected. The Dow Jones industrial average closed down 31.75 points at 16,880.36, and the broader Standard & Poor’s 500 managed a gain of 0.12 point, closing at 1,970.07. The Nasdaq composite closed at 4,462.90, up 20.20.
The economy sprang back to life after a dismal winter in which it shrank at a sharp 2.1 percent annual rate. The government upgraded that figure from a previous estimate of a 2.9 percent drop. But it was still the biggest contraction since early 2009 in the depths of the Great Recession.
Last quarter’s bounce-back reinforced analysts’ view that the economy’s momentum is extending into the second half of the year, when they forecast annual growth of around 3 percent.
The government also updated its estimates of growth leading into this year. They show the economy expanded in the second half of 2013 at the fastest pace in a decade and more than previously estimated. The revised data also show that the economy grew faster in 2013 than previously estimated, though more slowly in 2011 and 2012 than earlier thought.
The second quarter’s growth in the gross domestic product — the total output of goods and services — was the fastest since a 4.5 percent increase in the July-September quarter of 2013.
At the same time, a higher trade deficit slowed growth as imports outpaced an increase in exports.
Paul Ashworth, chief U.S. economist at Capital Economics, said that given last quarter’s rebound, he’s boosting his estimate for growth this year to 2 percent, up from a previous 1.7 percent forecast. Ashworth said the economy’s growth also supported his view that the Fed will be inclined to start raising rates early next year.
Most economists have been predicting that the Fed would wait until mid-2015 to start raising rates.
“This GDP report supports our view that an improving economy will persuade the Fed to begin raising rates in March next year,” Ashworth wrote in a research note.
Ashworth is among a group of economists who think growing strength in the job market and the economy will prod the Fed to move faster to raise rates to make sure inflation doesn’t get out of hand.
But so long as the overwhelming majority of workers’ pay is stagnant — as most gains go to the already wealthy, and those finally getting re-hired are part-time or making less than they did pre-recession — other economists think any inflationary pressure will be subdued.
The GDP report showed that one measure of inflation rose 2 percent last quarter, up from a 1.3 percent rise in the first quarter. The Fed’s inflation target is 2 percent, and for two years the GDP measure of inflation has been running below that level. Low inflation has given the Fed leeway to focus on boosting growth to fight high unemployment.
In its statement Wednesday, the Fed noted that inflation had risen closer to its 2 percent target. The statement said concerns that inflation would run persistently below the Fed’s 2 percent target had “diminished somewhat.” But it expressed no concerns about the slight acceleration in prices.
Fed Chairwoman Janet L. Yellen did see her first public dissent from a fellow policymaker since taking the reins in February. The president of the Federal Reserve Bank of Philadelphia, Charles Plosser, voted against the statement issued Wednesday, objecting to the line that the Fed’s benchmark rate would remain unusually low for a “considerable time” after the bond purchases end, expected this fall.
The economy’s sudden contraction in the first quarter had resulted from several factors. A severe winter disrupted activity across industries and kept consumers away from shopping malls and auto dealerships. Consumer spending slowed to an annual growth rate of 1.2 percent, the weakest in nearly three years.
Last quarter, consumer spending accelerated to a growth rate of 2.5 percent. Spending on durable goods such as autos surged at a 14 percent annual rate, the biggest quarterly gain since 2009. Analysts said that was an encouraging sign of consumers’ growing willingness to buy high-cost items like cars.
“Better job growth, a rising stock market, falling gasoline prices — all those things are starting to resonate on Main Street,” said Stuart Hoffman, chief economist at PNC Financial Services Group.
Hoffman suggested that five straight months of job gains above 200,000 were buoying both consumer and business confidence. He predicted that the July jobs report, to be released Friday, would show job growth of around 225,000.
“I think the economy has finally moved from the slow lane to the passing lane,” Hoffman said. He predicted growth of around 3 percent over the next year.
Still, he said he didn’t think the faster growth would lead the Fed to accelerate its first rate increase. Even with higher prices last quarter, inflation remains within the Fed’s 2 percent target.
The government’s revised estimates going back to 2011 show the economy expanded at an annual rate of 4.5 percent in last year’s third quarter, up from a previous 4.1 percent estimate. The growth rate was 3.5 percent in the fourth quarter, up from an earlier 2.6 percent estimate.
For 2013 as a whole, the government said the economy grew 2.2 percent, up from its earlier 1.9 percent estimate. But growth was weaker in 2011 and 2012 than previously estimated. It grew 2.3 percent in 2012, down from 2.8 percent. And growth in 2011 was downgraded to 1.6 percent from 1.8 percent.
Some April-June numbers
GDP growth rate
Business investment in equipment
Housing growth rate