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Strong 2nd-quarter growth puts recovery back on track, economists say

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The economy's 4% annual growth in 2nd quarter is a sharp turnaround from the 1st quarter's 2.1% contraction.

The U.S. economy’s better-than-expected expansion in the second quarter fueled optimism that growth was back on an upward trajectory, allaying fears that the recovery might have been derailed during a sharp winter slowdown.

“An inflection point in the economy may have been reached,” said Sung Won Sohn, an economist at Cal State Channel Islands. “Finally, it looks like the economy is on a sustained growth path.

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FOR THE RECORD

An earlier version of this post stated that the economy expanded at a 2.6% annual rate in the fourth quarter of 2013. The economy expanded at a 3.5% annual rate. Also, an earlier version of the post said Federal Reserve policymakers would update their economic forecasts Wednesday. They will not update them until September.

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Analysts had projected the nation's total economic output, or gross domestic product, would expand at a 3.1% in the second quarter. But the economy performed better than expected, with the strongest growth since the third quarter of last year, the Commerce Department said Wednesday.

Still, growth averaged just below 1% for the first half of the year, which was not strong.

But the 4% second-quarter expansion more than offset a revised 2.1% contraction in the first quarter. Wednesday’s figure was the Commerce Department's first estimate of second-quarter growth and could change with more data.

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

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

Bitter cold and heavy snow in much of the nation caused the economy to contract at a 2.1% annual rate in the first quarter. The Commerce Department revised the figure on Thursday after reporting a 2.9% contraction last month.

That was just the second quarter since the Great Recession ended five years ago that the economy shrank. The economy had expanded at a 3.5% annual rate in the fourth quarter.

Economists had attributed the first-quarter contraction largely to the bad weather and expected a turnaround would begin in the spring.

Wednesday’s data confirmed that the winter weakness was just a “weather-related anomaly,” said Robert Hughes, a senior research fellow at the American Institute for Economic Research.

“The important question is: Will the economy accelerate in the second half and beyond?” he said.

“Our view is that steady improvements in the labor market, gains in household wealth, and improving consumer confidence are likely to support faster real GDP growth in the second half,” Hughes said.

Doug Handler, chief U.S. economist at IHS Global Insight, noted that, excluding the first-quarter slowdown, the economy averaged 4% growth in the second half of 2013 and now again in the second quarter of this year. He doesn’t expect that to continue, but forecasts growth of 3% to 3.5% in the second half of 2014.

“Overall, this release provides evidence that the economy is healthy and will continue to grow at an above-average rate in the second half of this year and into 2015,” Handler said.

The second-quarter growth data should give Fed policymakers confidence to continue reducing their monthly bond-buying program, a move they are expected to announce Wednesday.

Also Wednesday, payroll firm Automatic Data Processing said the private sector added 218,000 net new jobs in July. That was down from 281,000 in June and and below analyst estimates, but still represents strong growth.

On Friday, the Labor Department is expected to report that the overall U.S. economy added about 233,000 net new jobs in July.

Such growth would be down from 288,000 net new jobs in June, but it would mark the sixth straight month the economy has added more than 200,000 new jobs. The last time that happened was in 1997.

For breaking economic news, follow @JimPuzzanghera on Twitter

Copyright © 2014, Los Angeles Times

UPDATE

July 30, 9:57 a.m.: This post has been updated with additional information, background and comments from economists.

The post was originally published at 6:07 a.m.

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