The economy grew at a 4.0% annualized pace during the second quarter, according to this morning’s advance estimate, well above the 3.2% consensus expectation.
Also revealed in today’s report was an upgrade to first quarter results. While still negative, the degree of drag was reduced to a 2.1% annual rate. Those revisions also pushed growth in the latter half of 2013 higher to an average rate of 4.0%.
Personal consumption bounced back after a lackluster start to the year, growing at a 2.5% rate. Of particular note was the sharp increase in spending on durable goods, which increased at a 14.0% rate.
Investment spending increased at a rapid 17.0% annualized clip. Business investment rebounded nicely to grow by nearly 6.0%, while the housing sector also expanded by a solid 7.5% after two quarters of decline. If there is a potential source of caution in an otherwise strong report, inventory buildup accounted for 1.6% of growth or about 40% of the 4.0% headline gain. Some of that increase may have been necessary to adjust for stocks that had been depleted in the preceding two quarters, but could presage a downward adjustment to production – and a moderate headwind to growth – in coming quarters.
Continued improvement in job market conditions and growing consumer confidence should provide continued fuel for the critical consumer sector. Stronger income growth would be a welcome accelerant, and one that should become more evident as the pool of unemployed and underemployed workers continues to shrink.
Evidence of stronger growth, coupled with the uptick in the pace of job creation, should keep the Fed on their current path toward winding down their bond purchases. While this reduction in accommodation will need to be overcome and expectations for second-half growth may still be on the optimistic side, the fundamental supports for continued growth appear to be in place.