By Kate Davidson
WASHINGTON--The U.S. economy accelerated modestly in the second
quarter after a slow start to 2015, but growth this year is still
less than last year's tepid first half and is well below the
overall pace of the recovery.
Gross domestic product, the broadest measure of goods and
services produced across the economy, grew at a 2.3% seasonally
adjusted annual rate in the second quarter, the Commerce Department
said Thursday.
Economists surveyed by The Wall Street Journal had forecast 2.7%
growth.
The Commerce Department also said the economy grew at a 0.6%
rate in the first quarter, an upward revision from a previously
reported 0.2% contraction.
The latest figures repeat a common pattern in recent years: a
slump at the start of the year, followed by a bounce back in the
spring and summer. That has worked out to mediocre growth over the
past six years, with no sustained breakout for the economy since
the end of the recession in 2009.
"The pace for growth remains extremely weak by past recovery
standards, but with potential growth weaker as well it appears to
be more than sufficient to keep the unemployment rate coming down,"
Jim O'Sullivan, chief U.S. economist at High Frequency Economics,
said in a note to clients.
Newly revised data show the expansion was weaker than previously
thought. From 2012 through 2014, GDP increased at an average annual
rate of 2%, according to three years of revised figures Commerce
released Thursday, a 0.3 percentage-point downgrade from prior
estimates.
So far this year, GDP has grown at an average annual rate of
1.5%, compared with 1.9% in the same period a year earlier.
Still, that may be enough to nudge Federal Reserve officials
toward raising short-term interest rates from near-zero as soon as
September. The Fed on Wednesday offered a more upbeat assessment of
the economy following its two-day policy meeting, noting moderate
household spending growth and additional improvement in the housing
sector, even as business investment remained weak.
Thursday's report showed stronger consumption and solid
residential investment helped drive GDP growth in the second
quarter, along with an upturn in exports and a boost in state and
local government spending.
The latest data "suggests that the economy is in far better
shape than previously thought," said TD Securities economist Millan
Mulraine. "In that regard, it should provide the Fed with further
confidence in their relatively optimistic growth outlook."
Unlike last year, when much of the first-quarter weakness was
blamed on unusually harsh winter weather, this year's slower growth
reflected a range of factors, including a stronger dollar, sluggish
business investment and lackluster consumer spending. Thursday's
report showed some of those pressures may be starting to ease.
The rising dollar has pushed up the cost of American-made goods
for customers overseas, while foreign products are cheaper in the
U.S. In the second quarter, exports rose at a 5.3% rate, compared
with a 6% drop in the first quarter. Imports, which subtract from
GDP, rose 3.5%, versus a 7.1% increase in the first three months of
the year.
Consumer spending, which accounts for more than two-thirds of
economic output, rose 2.9% in the second quarter, compared with
2.1% in the first three months of the year. Overall consumer
spending has been choppy, suggesting some Americans remain cautious
about opening their wallets despite strong job gains this spring
and accelerating wages.
But there are signs consumers may be starting to spend some of
the windfall they received from months of lower gasoline prices.
The saving rate fell in the second quarter, to 4.8% from 5.2%,
while Americans spent more on long-lasting products, including
cars.
Thursday's report also showed the housing market provided a
boost to the economy in the second quarter, amid signs of strong
activity during the spring selling season. Residential investment
advanced at a 6.5% pace. However, that gain comes after two
quarters of at least 10% growth.
"In sum, the mixing and matching of what drives GDP growth has
shifted to consumption and housing," ITG chief economist Steve
Blitz said in a note to clients.
Government spending also rose 0.8% in the second quarter,
compared with a 0.1% decline in the first quarter, due entirely to
an increase in state and local municipal spending.
Business spending, another key driver of the economy, remained
soft in the second quarter and actually dragged down the overall
GDP number for the first time since the third quarter of 2012.
Nonresidential fixed investment--which reflects spending on
software, research and development, equipment and
structures--retreated at a 0.6% rate, compared with a 1.6% growth
rate in the first quarter.
The numbers could be a sign businesses remain wary despite
stronger consumer spending, steady job gains and an improving
housing market.
The change in inventories had little effect on the overall
figure, subtracting just 0.08 percentage point from the overall
advance.
Excluding the effect of company restocking, underlying demand in
the economy picked up in the second quarter. Real final sales of
domestic product, a measure that excludes changes to inventories,
increased at a 2.4% pace, compared with a 0.2% decline in the first
quarter.
Many economists have said they expect growth to pick up in the
second half of the year, but some forecasts are muted. Ahead of
Thursday's GDP release, for example, Macroeconomic Advisers was
predicting a 2.7% pace in the third quarter.
That would do little to help overall growth break out of its
pattern of roughly 2% growth through much of the expansion. Fed
staff forecast the economy to grow just 1.55% in 2015, according to
projections prepared for the Fed's June policy meeting that were
inadvertently posted to the central bank's website last week.
Fed officials upgraded their assessment of the economy
Wednesday, pointing to solid job gains and diminished labor market
slack.
There are signs in Thursday's report that inflation is also
firming. The price index for personal consumption expenditures--the
Fed's preferred measure for inflation--rose at a 2.2% pace in the
second quarter. Core prices, which exclude food and energy costs,
rose 1.8%.
Some economists said the latest GDP data won't have a major
implications for the Fed's first rate increase.
"Upcoming readings on jobs will be more important factors, as
the FOMC indicated that 'some' further improvement in the labor
market is still needed before normalization will begin," Credit
Suisse economist Dana Saporta said in a note to clients.
Corrections & Amplifications
The Federal Reserve upgraded its assessment of the economy on
Wednesday. An earlier online version of this article erroneously
said the upgrade came Thursday.
Write to Kate Davidson at kate.davidson@wsj.com