US growth stronger and jobless claims drop…

US Growth

The US economy rebounded more strongly than initially thought in the second quarter with more of the growth being driven by domestic demand and less by restocking by businesses.

Gross domestic product expanded at a 4.2% annual rate instead of the previously reported 4.0% pace, the Commerce Department said yesterday, reflecting upward revisions to business spending and exports.

It combined with separate reports showing a second consecutive week of declines in the number of Americans filing new claims for unemployment benefits and a jump in home purchase contracts to give the economy a healthy glow.

“We expect growth during the latter half of the year to continue running at an above 3% pace, underscoring the rebound in growth momentum as economic slack continues to decline,” said Gennadiy Goldberg, an economist at TD Securities in New York.

Separately, the Labor Department said the number of Americans filing new applications for jobless benefits slipped 1,000 to a seasonally adjusted 298,000 last week, underscoring the strengthening labour market fundamentals.

In a third report, the National Association of Realtors said its Pending Home Sales Index, which leads home resales by a month or two, increased 3.3% in July to its highest level in 11 months.

That was the latest indication that the housing market recovery was back on track after faltering in the second half of 2013 in the wake of a run-up in mortgage rates.

The composition of growth in the second quarter was even more encouraging, with the sources of growth broad-based.

Domestic demand increased at a brisk 3.1% rate, instead of the previously reported 2.8% pace. It was the fastest pace since the second quarter of 2010 and suggested the recovery was becoming more durable after output slumped in the first quarter because of an unusually cold winter.

The broad-based growth, however, will not be enough to spur the Federal Reserve to start raising interest rates as slack still exists in the labour market and inflation will probably continue to run below the US central bank’s 2% target.

“We still have a long way to go. Hence, the Fed remains cautious about how rapidly it raises rates,” said Diane Swonk, chief economist at Mesirow Financial in Chicago.

Economists had expected the second-quarter GDP growth pace would be revised down to 3.9%. The economy contracted at a 2.1% pace in the first quarter.

Gross domestic income, which measures the income side of the growth ledger, surged at a 4.7% rate, consistent with strong job gains during the quarter. That was the fastest increase since the first quarter of 2012.

This alternative growth measure decreased at a 0.8% pace in the first quarter. While personal income growth for the first quarter was revised down a bit, estimates for the second quarter were more robust than previously believed.

After tax corporate profits rebounded from a decline that had been spurred by the expiration of a depreciation bonus, hitting a three-year high in the second quarter.

Growth in consumer spending, which accounts for more than two-thirds of US economic activity, was unrevised at a 2.5% rate.

Businesses accumulated $83.9bn worth of inventory in the second quarter, less than the initially reported $93.4bn. That saw restocking contributing 1.39 percentage points to GDP growth rather than 1.66 percentage points.

The relatively smaller inventory build means less stock overhang, which bodes well for third-quarter GDP growth. Third-quarter growth estimates range as high as a 3.6% rate.

While trade was a drag for a second consecutive quarter, export growth was raised to a 10.1% pace from a 9.5% rate. Business spending on equipment and non-residential structures, such as gas drilling, was revised higher.

Housing market-related spending was revised slightly down as was government spending.