U.S. GDP Growth Revised Upwards on Declining Unemployment Rates

The United States GDP rose at a 4.2% annual rate in the second quarter, according to a new estimate by the Commerce Department’s Bureau of Economic Analysis.

The United States GDP rose at a 4.2% annual rate in the second quarter, according to a new estimate by the Commerce Department’s Bureau of Economic Analysis.

Previously, the Commerce Department had estimated a 4% rise in U.S. GDP. The BEA said that they have improved their estimate of GDP growth based on an increase in nonresidential fixed investment, which was “larger than previously estimated”. Nonresidential fixed investment rose 8.4% in the second quarter, compared to growth of 1.6% in the first quarter, when overall GDP fell 2.1% in the U.S. The BEA attributed the unusual contraction to very cold weather.

Greater fixed investment expenditure is typical of economic recoveries, and the unusually large rise in nonresidential fixed investment may be an indicator of greater business confidence. In a separate survey earlier this month by the National Federation of Independent Business, small business confidence rose to 95.7% in July, with many respondents citing improving credit conditions as a main driver of investment.

At the same time, private inventory investment was smaller than previously estimated, adding 1.39% to real GDP growth in 2Q, up from -1.16% in the first quarter. GDP less change in private inventories rose 2.8% in the second quarter, versus -1% in the first quarter.

Steady Consumer Spending, Falling Jobless Claims

The BEA also estimates that real personal consumption expenditures rose 2.5% in the second quarter, versus 1.2% growth in the first quarter. Analysts have expected consumption expenditures to continue to rise as unemployment declines, although stagnant real incomes have been a headwind to major consumption expenditure growth fora long time.

The BEA noted that GDI rose 4.7% in the second quarter, while disposable personal income rose by 6.6% in the second quarter, in current-dollar measures. Disposable income growth has been volatile in recent years, but analysts look to this as a forward indicator of consumer demand.

In line with personal income growth, personal consumption expenditures (PCE) rose 1.6% from the same period a year ago in the second quarter, with spend growth on services (2.2%) far outpacing spend growth on goods (0.2%). PCE excluding food and energy rose 1.5%, which may suggest discretionary spending is on the rise.

While the BEA reported healthy growth in consumption in the U.S., the Department of Labor has reported a decline in weekly unemployment claims, which fell to 298,000 for the week ending August 23rd. The 4-week moving average for unemployment claims fell to 299,750, the lowest rate since 2006. The 4-week moving average has been on a steady decline since peaking in 2009, and has remained at or below pre-crisis levels since April this year.

A Steady Recovery

Commenting on its report, the BEA wrote “the general picture of economic growth remains the same” in its news release, which echoes the attitudes of many economic analysts, who have suggested that a slow but steady recovery is likely to be the economic trend for America in 2014.

For economic growth to reaccelerate at a faster past, loosening credit standards and greater aggregate demand, either from rising wages or greater consumer confidence, will need to take place. Currently, growth in the GDP is being drive by “positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment,” according to the BEA. Of those categories, nonresidential fixed investment is growing at the largest rate, while private inventory investment and PCE are laggards.