Business

U.S. economy grows at 4% annual rate in second quarter

The U.S. gross domestic product grew at a 4% annual rate from April to June, the Commerce Department says
The economy's strong second-quarter growth shows the recovery has regained momentum after a brutal winter
Although the 4% GDP growth rate was impressive, economists cautioned not to get too excited

The economy's strong second-quarter growth showed the recovery has regained momentum after a brutal winter and could signal a quicker end to the era of rock-bottom interest rates.

The nation's total economic output, or gross domestic product, increased at a 4% annual rate from April through June, the Commerce Department said Wednesday.

It was a better-than-expected rebound from an alarming first-quarter contraction and confirmed experts' assumptions that the dismal performance in the first three months was triggered in large part by severe weather across much of the nation.

"The first quarter was indeed the aberration," said Doug Handler, chief U.S. economist at IHS Global Insight.

Although the 4% growth rate was impressive, marking just the third quarter since the end of the Great Recession that the economy grew at that pace or higher, economists cautioned not to get too excited.

About a third of that growth probably came from consumers and businesses catching up for activity lost in the first quarter. And the figure could be revised down in the coming weeks.

Overall, the economy has expanded at slightly less than 1% during the first half.

"While I think we should be celebrating the second-quarter rebound, it's really not a strong economic recovery," said Sung Won Sohn, an economist at Cal State Channel Islands.

Still, economists expect growth to pick up in the second half.

The labor market continues to improve, with analysts expecting the government to report Friday that the U.S. added about 233,000 jobs this month. That would be the first time since 1997 that the economy has added more than 200,000 jobs in six straight months.

The improving economic picture increases pressure on the Federal Reserve to dial back even more on its easy-money policies.

After a two-day meeting, the Fed said in a statement Wednesday it would continue to trim its bond-buying stimulus program. But the central bank left its key short-term interest rate near zero and gave no indication that it would change course any time soon.

Financial markets aren't expecting a rate increase until well into next year. But with the economy having snapped back from the winter downturn and inflation moving higher toward the Fed's 2% target, there were indications that policymakers are feeling more pressure to act sooner.

The vote on the Fed statement contained the first public dissent since Janet L. Yellen took over as Fed chairwoman in February.

Charles Plosser, president of the Federal Reserve Bank of Philadelphia, objected to saying that the benchmark rate would remain unusually low for a "considerable time" after the bond purchases end, which is expected to happen in October.

The bond program began in 2012 with the central bank buying $85 billion a month of Treasury bonds and mortgage securities to push down long-term interest rates. Since January, Fed officials have reduced the buying by $10 billion a month and voted Wednesday to cut another $10 billion out to $25 billion starting in August.

"The pendulum is gradually shifting toward raising the interest rate sooner rather than later," Sohn said.

He said an increase — the first since the Fed lowered the rate to near zero in late 2008 — could come as early as next spring.

Worries about rising prices are fueling the push to start raising interest rates.

In past months, Fed officials have expressed concern that inflation was running too low. But more recently, consumer prices have edged higher.

Wednesday's economic growth report showed a key measure of annual inflation rose to 1.6% in the second quarter from 1.1% in the first quarter.

The biggest change in the Fed's policy statement was an acknowledgment of inflation, said Greg McBride, chief financial analyst at Bankrate.

"It gives them cover in the event we see an increase in inflation in the months ahead that forces the Fed to accelerate rate hikes," McBride said.

The Fed statement, however, made clear that most policymakers still were tilting toward doing more to help workers than halt inflation.

"Labor market conditions improved, with the unemployment rate declining further," the Fed said. "However, a range of labor market indicators suggests that there remains significant under-utilization of labor resources."

That was a reference to the large numbers of long-term jobless, part-time workers who want more hours and millions of people who have dropped out of the job market entirely.

Payroll firm Automatic Data Processing Inc. said Wednesday the private sector added 218,000 jobs in July. That was down from 281,000 in June and below analysts' estimates, but it still represented strong growth.

Solid job gains in recent months were an early indication the first-quarter slowdown was an anomaly.

Bitter cold and heavy snow in much of the nation helped cause the economy to contract at a 2.1% annual rate in the first quarter. That was just the second quarter since the Great Recession ended five years ago that the economy shrank.

The Commerce Department revised the figure Thursday after reporting a 2.9% contraction last month.

The economy was boosted this spring by a jump in consumer spending, which rose 2.5%, compared with 1.2% in the first quarter.

Business investment surged 5.5% in the second quarter after a 1.6% increase the previous quarter. Exports jumped 9.5% after decreasing 9.2% in the first quarter.

The economy is unlikely to continue that pace, Handler said. But after a difficult winter, the signs are looking up.

"It's an economy that's growing at a nice, moderate and sustainable rate," he said.

jim.puzzanghera@latimes.com

don.lee@latimes.com

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