The US economy grew faster than first thought last quarter, the Commerce Department said Thursday, the latest in a series of signals that suggest a period of sustainable growth lies ahead.
Increased investment by businesses and a slightly improved trade picture prompted the revision, which lifted the estimated annual rate of growth in April, May and June to 4.2 percent from the government’s initial reading of 4 percent in late July.
Since the economy emerged from the recession five years ago, companies have been hesitant to spend heavily on new capacity, but these figures and other recent data indicate that is finally changing.
“Not only was there an upward revision, but the composition points to solid growth in the second half of this year,” said Stuart G. Hoffman, chief economist at the PNC Financial Services Group in Pittsburgh. “Businesses have bounced back after the bad winter disrupted production and demand.”
In a separate report Thursday, the Labor Department said initial claims for unemployment benefits dropped last week by 1,000, to 298,000, helping push the eight-week average for new claims to below 300,000 for the first time since April 2006, well before the onset of the recession.
President Obama hailed the improving economic news, saying that “companies are investing, consumers are spending.”
In brief remarks to reporters Thursday afternoon, Obama noted that private businesses had created 10 million new jobs since the recession ended, and he said “there are reasons to feel good about the direction that we are headed.”
But he added that there was “more that we should be doing” to improve the economy further, and he promised to push Congress on those things when lawmakers return to Washington in September.
Despite the faster overall growth rate, however, businesses still seem to be benefiting more from the economy’s upward trajectory than many individual consumers.
Thursday’s revision, for example, lowered the estimate of workers’ wage and salary growth slightly in the first half of 2014, with income rising 5.8 percent in the second quarter. Corporate profits, on the other hand, jumped 8 percent in the second quarter, the Commerce Department said.
That split could change if unemployment continues to drop and the labor market tightens enough to give employees more bargaining power to demand higher pay. Although the unemployment rate has fallen to 6.2 percent from 8.2 percent two years ago, broader measures of joblessness remain much higher, meaning that, for now, there is little incentive for employers to substantially raise wages to retain and attract workers.
Economists expect the unemployment rate to fall below 6 percent by the end of 2014, and Janet L. Yellen, the chairwoman of the Federal Reserve, will be closely watching the data on employment, wages and inflation to determine when to start raising interest rates next year, said Doug Gordon, senior investment strategist, North America, at Russell Investments in Seattle.
So far, inflationary pressures remain muted, and Gordon and most other market observers do not expect the Fed to start increasing rates from their level close to zero until the middle of 2015.
The next major reading on the job market will come on Friday, Sept. 5, when the Labor Department reports on employment and job creation in August. Wall Street economists are predicting that employers added roughly 220,000 jobs this month, with the unemployment rate dropping 0.1 percentage point to 6.1 percent.
One conundrum, Gordon said, is that even as the economy builds momentum, the yield on the benchmark 10-year Treasury bond has been falling, the opposite of what usually happens to bond yields when growth picks up.
In part, Gordon attributed this trend to increased demand for Treasury bonds as a safe harbor in the face of rising tensions in Ukraine, and very weak economic growth across Europe, where borrowing rates in countries like Germany and France are even lower than in the United States. In addition, he said, pension funds and institutional investors who have enjoyed big stock market gains in 2013 and 2014 may be “de-risking” and buying Treasury securities to diversify their holdings.
Another clue as to how substantial the economic rebound will be for the rest of the year will come Friday, when the Commerce Department reports data on personal income and spending for July.
On Tuesday, the Commerce Department reported a strong reading for durable goods orders in July.
Separately, the National Association of Realtors said Thursday that its index of pending home sales rose 3.3 percent in June, a stronger gain than many economists had expected.
Thursday’s report on gross domestic product is the second of three estimates issued by the Commerce Department. The final reading is due on Sept. 26.
Within the report, analysts were especially pleased that the upward revision was largely due to factors that signify healthy demand, rather than the piling up of inventories.
The estimate of final sales in the second quarter was revised upward, to 2.8 percent from an initial reading of 2.3 percent, while inventory gains were revised downward.