Economic Growth Accelerated in the Second Quarter

By Robert Hughes

The initial estimate for second-quarter real gross domestic product shows the economy expanded at a 2.6 percent annualized rate, up from a revised 1.2 percent pace in the first quarter. The 2.6 percent growth rate is solidly above the 2.1 percent average annualized pace since 2009. Price measures included in the report show price increases decelerated sharply in the second quarter, with the GDP price index rising at a modest 1.0 percent annualized rate. The price index for personal consumption expenditures increased just 0.3 percent at an annual rate. Over the past four quarters, the GDP price index has risen 1.7 percent while the PCE price index gained 1.6 percent. Overall, growth continues at a moderate pace by historical measures and price increases remain tame.

Among the major components of GDP, four of the six areas contributed positively to GDP growth in the first quarter. Personal consumption expenditures (consumer spending), the largest component of GDP, rose at a 2.8 percent pace, up from a 1.9 percent rate in the prior quarter, contributing 1.9 percentage points to the 2.6 percent GDP gain. The rebound in consumer spending was broad-based and appears well-supported by the tight jobs market. The few soft areas of consumer spending in the second quarter were in motor vehicle sales, dining out, and spending on hotels and accommodations.

Business investment posted its fifth consecutive quarterly increase, though the pace slowed to 5.2 percent from 7.2 percent rate in the first quarter. The gains resulted in contributions of 0.86 and 0.64 percentage points for the first and second quarters respectively. Residential investment had the largest negative impact on real GDP growth, posting a 6.8 percent annualized drop versus an 11.1 percent annualized gain in the first quarter. That reversal meant residential investment took 0.27 percent from real GDP growth in the second quarter. Change in inventories was the other negative contributor to growth in the second quarter, reducing the overall growth rate by 0.02 percentage points.

Net exports, exports minus imports, added 0.18 percentage points to growth. For the second quarter, exports rose at a 4.1 percent annual rate while imports rose at a 2.1 percent pace. Better global growth and a flat-to-lower dollar should provide further support to export growth in the coming quarters.

Government expenditures rose at a 0.7 percent rate in the second quarter, led by a 5.2 percent increase in defense spending. Nondefense spending and spending at the state and local level both saw declines in the second quarter.

Real final sales to private domestic purchasers, a key measure of private-sector domestic demand, rose at a 2.7 percent annual rate, down slightly from a 3.1 percent rate in the first quarter. Private domestic demand has had positive growth every quarter since 2010 and has averaged 2.9 percent growth over that period. Private domestic demand remains the key driver of the domestic economy.

Overall, the economy is continuing to expand at a moderate pace, and price increases remain modest. Most components of private domestic demand have the potential for continued expansion.

 

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Robert Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.