US economy expands at modest 1.7 per cent rate in 2nd quarter as businesses step up spending

WASHINGTON – The U.S. economy grew from April through June at a seasonally adjusted annual rate of 1.7 per cent, as businesses spent more and the federal government cut less.

The Commerce Department said Wednesday that growth improved from a sluggish 1.1 per cent rate in the January-March quarter, which was revised from an initial 1.8 per cent rate.

The pickup in growth was surprising as most economists predicted a far weaker second quarter. And it suggests the economy could accelerate later this year as businesses step up spending and the drag from steep government cuts fade.

Businesses increased their spending 4.6 per cent in the second quarter after cutting by the same amount in the previous quarter. And spending on home construction grew 13.4 per cent, in line with the previous quarter.

At the same time, the federal government cut spending only 1.5 per cent after an 8.4 per cent plunge in the first quarter. And state and local governments increased spending for the first time in a year.

Consumers increased their spending more slowly in the second quarter. And a surge in imports reduced growth by the most in three years.

Economists are hopeful that growth could improve to around 2.5 per cent in the third and fourth quarters.

There were signs in the report that companies expect demand to pick up. Businesses added to their stockpiles in the second quarter, which is typically a sign they foresee greater sales. And the big rise in imports reflects solid consumer and business spending.

The government also released comprehensive revisions that updated the nation’s gross domestic product, or GDP, over the last several decades. Those figures showed that the economy grew at a stronger 2.8 per cent in 2012, up from an earlier estimate of 2.2 per cent. Last year’s first quarter was revised much higher, while the economy barely expanded in the fourth quarter.

GDP is the broadest measure of the nation’s output of goods and services, including everything from manicures to industrial machinery.

Other recent data have been encouraging and suggest that growth will continue to improve.

Home construction, sales and prices have been growing since early last year. Americans purchased newly built homes in June at the fastest pace in five years. That’s raised builder confidence to a seven-year high, which should lead to increases in construction and more jobs.

Overall hiring has accelerated this year. Employers have added an average of 202,000 jobs a month from January through June. That’s up from 180,000 in the previous six months.

And auto sales topped 7.8 million in the first six months of 2013, the best first-half total since 2007. Analysts expect sales will stay strong for the rest of the year.

There are threats to the better outlook. Unemployment is still high at 7.6 per cent, limiting consumer spending. And budget fights in Washington could lead to a government shutdown this fall, potentially disrupting the economy.

Federal Reserve officials have forecast better growth in the second half of the year. And Fed Chairman Ben Bernanke has said that the central bank could begin to scale back its bond purchases later this year if the economy strengthens. But Fed officials typically put greater weight on employment and inflation data than the GDP figures.

The Fed concludes a two-day policy meeting on Wednesday, at which point it could clarify its interest-rate policies.