Bloomberg News

Economy in U.S. Expands 4.2%, More Than Previously Forecast

August 28, 2014

The economy in the U.S. expanded more than previously forecast in the second quarter, propelled by the biggest gain in business investment in more than two years that bodes well for the rest of 2014.

Gross domestic product, the value of all goods and services produced, rose at a 4.2 percent annualized rate, up from an initial estimate of 4 percent and following a first-quarter contraction, Commerce Department figures showed today in Washington. The median forecast of 77 economists surveyed by Bloomberg called for a 3.9 percent gain. Corporate profits climbed by the most in almost four years.

The improvement has carried over into the second half with companies such as General Electric Co. (GE:US) seeing more orders for equipment and a strengthening job market underpinning consumer spending, which accounts for about 70 percent of the economy. Better prospects for growth signal Federal Reserve officials will continue to wind down monthly asset purchases.

“The economy is clearly doing better,” Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York, said before the report. O’Sullivan was the second-best forecaster of GDP in the past two years, according to data compiled by Bloomberg. “Business spending is picking up. We’ll see stronger consumer spending in coming months.”

Economists’ estimates in the Bloomberg survey ranged from 3.5 percent to 4.3 percent.

Jobless Claims

Another report today showed the number of Americans filing for unemployment benefits were little changed last week as employers held on to staff in an improving economy.

Claims decreased by 1,000 to 298,000 in the week ended Aug. 23 from 299,000 in the prior period, the Labor Department reported. The median forecast of 46 economists surveyed by Bloomberg called for an increase to 300,000.

Stock-index futures held earlier losses after the reports. The contract on the Standard & Poor’s 500 Index maturing in September declined 0.3 percent to 1,990.8 at 8:36 a.m. in New York as concern over Ukraine intensified.

The revisions to GDP showed the pickup in growth last quarter came from bigger gains in corporate spending on structures and equipment and a smaller trade deficit that was partly offset by more tepid inventory building.

Business investment increased at an 8.1 percent annualized rate, the most since the first three months of 2012.

Business Spending

Companies are buying more equipment as earnings improve. Today’s report also offered a first look at corporate profits. Before-tax earnings rose 8 percent last quarter, the most since the third quarter of 2010, after a 9.4 percent drop in the prior period. They were still down 0.3 percent from the same time last year.

Corporate investment data are indicating a pickup. A surge in demand for airplanes helped push orders for durable goods up at a record pace in July, boosting prospects for sustained growth in manufacturing, a report showed on Aug. 26. Bookings for goods meant to last at least three years soared 22.6 percent after a revised 2.7 percent gain in June.

General Electric posted second-quarter earnings that matched analysts’ estimates, helped by rising sales in units making jet engines and gas turbines. The Fairfield, Connecticut-based company said its backlog of equipment and services rose in every segment to a total of $246 billion.

“Our orders and backlog give us confidence in the second half and 2015,” Chief Executive Officer Jeffrey Immelt said on a July 18 conference call with analysts.

Consumer Spending

Household consumption, which accounts for about 70 percent of the economy, grew at a 2.5 percent annualized rate, the same as previously estimated.

Consumers’ purchasing power improved, with disposable income adjusted for inflation rising at a 4.2 percent from April through June after a 3.4 percent gain in the first quarter.

Today’s report also included revisions to first-quarter personal income. Wages and salaries rose by $131.3 billion, revised down from an initially reported $135.1 billion gain. They climbed by $103.6 billion in the second quarter.

Gross domestic income, which reflects all the money earned by consumers, businesses and government agencies climbed at a 4.7 percent annualized rate in the second quarter, the most since early 2012.

Automobile sales near an eight-year high bode well for consumer spending and factory production. Cars and light trucks sold at a 16.4 million pace in July, following a 16.9 million rate the prior month that was the fastest rate since July 2006, figures from Ward’s Automotive Group showed.

Employment Gains

More hiring and stock-market gains that are boosting confidence also are healing household finances, which will help consumer spending. Payrolls in July marked the sixth month of gains exceeding 200,000, the longest such stretch since 1997, according to the Labor Department.

Gap Inc. (GPS:US), the owner of chains including its namesake, Banana Republic and Old Navy, is among companies hoping to benefit from an improving environment for shoppers. The San Francisco-based retailer posted second-quarter profit that topped analysts’ estimates.

“The consumer is feeling slightly better, which we think is good for the overall industry,” Chief Executive Officer Glenn Murphy said on an Aug. 21 conference call with investors.

Stripping out inventories and trade, the two most volatile components of GDP, so-called final sales to domestic purchasers increased 3.1 percent, up from a previously reported 2.8 percent gain and the biggest advance in four years.

The GDP estimate is the second of three for the quarter, with the third release scheduled for late September when more information becomes available. The economy shrank at a 2.1 percent pace from January through March.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Carlos Torres at ctorres2@bloomberg.net


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Companies Mentioned

  • GE
    (General Electric Co)
    • $25.78 USD
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  • GPS
    (Gap Inc/The)
    • $41.42 USD
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