WASHINGTON (MarketWatch) — The U.S. economy sprang back to life in second quarter and expanded at the fastest pace since last fall, fueled by a upturn in consumer spending on big-ticket items such as cars and trucks as well as a sharp rebound in business investment.
Gross domestic product — the value of all goods and services produced by the U.S. — grew at a 4% annual clip in the second quarter, the government said Wednesday. Newly revised figures also show that the economy contracted by a somewhat smaller 2.1% in the first quarter instead of 2.9% as previously reported.
Economists polled by MarketWatch predicted GDP would grow by a seasonally adjusted 3.2% in the April-to-June period. U.S. stock futures SPY +0.34% extended gains on the data.
The rebound in growth offers further proof that a plunge in first-quarter GDP was an outlier. The economy contracted sharply in the first three months of the year mainly because of an unusually harsh winter and a decline in health-care spending tied to the introduction of Obamacare.
Consumer spending, the main source of economic activity, accelerated to show a solid 2.5% gain after a meager 1.2% advance in the first quarter. Health-care spending, which fell early in the year to contribute to the big drop in U.S. growth, rose modestly in the spring.
Bigger stock dividends also helped to boost inflation-adjusted disposable income by 3.8% in the second quarter and underpin the increase in spending.
Consumers mostly shelled out for big-ticket items such as cars and trucks. Spending on goods designed to last three years or more shot up 14%, the largest gain since 2009. Outlays on services such as financial advice and personal care rose a slim 0.7%, however.
Also adding to growth was a pickup in construction spending, increased business investment, a bigger buildup in inventories and slightly higher government spending.
Investment in residential housing rose 7.5% and business spending on equipment climbed 7%.
The increase in inventories was valued at $93.4 billion vs. a $35.2 billion increase in the first quarter.
The federal government slightly reduced spending, but a 3.1% pickup at the state and local level boosted overall government outlays.
The only major drag on second-quarter growth was net exports. Imports rose a faster 11.7% compared to a 9.5% advance in exports.
Inflation as measured by the Federal Reserve’s preferred price index, meanwhile, surged in the second quarter to the highest annual rate in three years, potentially making the central’s bank effort at managing the U.S. recovery more difficult.
The PCE index rose at a 2.3% annual rate in the April-to-June period, compared to 1.4% in the first quarter. That’s the fastest pace since the second quarter of 2011.
And the core PCE that excludes food and energy climbed at a 2% clip, up from 1.2%.
The Fed believes the pickup in inflation has been exaggerated by temporary factors that should ease soon, but if the central bank is wrong, it could be forced to raise interest rates sooner than it would like.
The Fed would like to see inflation in an annual range of 2% to 2.5% — anything much higher or lower is viewed by most top bank officials as harmful to the economy in the long run.
Top Fed officials were scheduled to meet Wednesday morning to plot their next move. The central bank is winding down a massive stimulus program on the expectation that growth will continue to improve.
GDP is revised twice after its initial release. The second estimate will come out next month.
Earlier, ADP reported that private-sector payrolls grew by 218,000 in July.
