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U.S. Department of Commerce

Economy heats up in Q2 after harsh winter

Paul Davidson
USA TODAY

The U.S. economy posted better-than-expected growth in the second quarter, bouncing back from its worst performance in five years.

Conquisia Tyler, right, gives change to a customer at Sam's Club in Bentonville, Ark.

U.S. gross domestic product, which measures the output of goods and services in the economy, expanded at a seasonally adjusted annual rate of 4% in the three months ended June 30, the Commerce Department said Wednesday. Consumer spending, business investment and inventory stockpiling all rebounded strongly. Economists surveyed by Action Economics expected 3% growth.

The government also said the economy shrank 2.1% in the first quarter, not as disappointing as the 2.9% contraction it previously reported. Extreme winter weather held back consumer and business spending then. But 2014's first three months were still the economy's weakest quarter since 2009's first period when the U.S. was in recession.

Consumer spending, which makes up more than two-thirds of the economy, increased 2.5% in the second quarter, more than double the 1.2% rise in first quarter, the government said.

A faster pace of stockpiling by businesses contributed to the second quarter increase — a reversal from the first quarter when a slowdown in inventory building subtracted from GDP growth.

Meanwhile, business investment in equipment surged 7%, vs. a 1% drop in the first quarter.

Exports jumped 9.5% after falling 9.2% in the previous quarter.

Housing construction rose 7.5% after declining 5.3% in the earlier quarter.

Despite the positive revisions, the economy grew at an average annual rate of about 1% in the first half of this year, well below the pace of 3% or more economists had projected last year.

Noting that job growth has accelerated substantially this year and measures of manufacturing and service sector growth have been strong, some economists expect the first-quarter GDP data to be revised still higher.

"We do not believe the 1% first-half average is a fair representation of the trend in this case," Jim O'Sullivan, chief U.S. economist at High Frequency Economics, said in a research note.

The Commerce Department on Wednesday also released annual revisions to previous growth estimates based on more complete survey data.

Growth was more rapid than previously estimated in 2013 — 2.2%, up from the previous 1.9% estimate. The economy expanded at a robust 4% annual clip in the second half of last year. Growth estimates were revised to 4.5% and 3.5% in the third and fourth quarters respectively, up from 4.1% and 2.5%.

Anthony Zingale wires blender motors at the Vitamix manufacturing facility in Strongsville, Ohio.

From the second quarter of 2009 — when the recovery began — through the first quarter of this year, the government's estimate that the economy grew at an average annual rate of 2.1% was unchanged.

Before the weak first quarter, many analysts expected households' rising wealth and falling debt, along with increased bank lending, to push economic growth well above the 5-year-old recovery's pace.

Bad weather has not been the only culprit. Wage gains have barely kept pace with inflation, holding back consumer spending. And the pace of housing's recovery has fallen behind last year instead of accelerating as forecast.

Many economists expect both wage increases and the housing market to pick up in the second half of the year.

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