By Kate Davidson
The U.S. economy emerged from its winter lull with a moderate
spring rebound, but the historically sluggish expansion is looking
even more sluggish as it enters year seven.
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. And the economy actually expanded at a 0.6% pace in
the first three months of the year, an upward revision from a
previously reported 0.2% contraction.
Yet further data revisions going back more than three years show
the expansion--already the weakest since World War II--was even
worse than previously thought, with GDP increasing at an average
annual rate of 2% between 2012 and 2014, down 0.3 percentage point
from prior estimates.
While the first half's growth rate of 1.5% was better than
expected thanks to the first-quarter revision, economic growth so
far this year has been even slower than during last year's tepid
first half and well below the pace of the overall recovery.
Still, the modest growth figures are likely strong enough to
keep the Fed on track to begin raising short-term interest rates as
early as September for the first time in nearly a decade.
But the latest GDP reading diminishes hopes for a long-awaited
growth breakout year and seems to lend support for the Fed's plan
to raise rates slowly over the next several years to ensure the
economy doesn't falter or even tip into a recession. The figures
also suggest the economy's growth potential is lower than
previously thought.
"It matters over time because the degree to which the economy
can advance and people's standards of living can increase is a
function of how fast the economy grows," said Stephen Stanley,
chief economist at Amherst Pierpont Securities. The latest figures
"mean the economy is going to grow more slowly...going
forward."
The latest figures repeat a familiar pattern over the past
several years: a slump at the start of the year, followed by a
bounce-back in the spring and summer.
This year's tepid first quarter reflected a variety of factors
that continued to weigh on output in the second quarter, including
a stronger dollar, sluggish business investment and choppy consumer
spending.
But there are signs those pressures may be starting to ease. The
housing market appears to be building momentum after years of
uneven recovery. And the unemployment rate fell to its lowest level
since 2008 in June, as U.S. employers added jobs for the 57th
straight month--the longest stretch on record.
Strong job gains and accelerating wage growth supported stronger
household consumption in the second quarter, contributing two
percentage points to the overall quarterly GDP number. Consumer
spending, which accounts for more than two-thirds of economic
output, rose 2.9% in the second quarter, compared with 1.8% in the
first three months of the year.
Consumers also appear to be spending some of the money they
saved earlier this year on cheaper gasoline. The saving rate fell
in the second quarter, to 4.8% from 5.2% in the previous quarter,
while Americans spent more on long-lasting products including
cars.
Retail sales are up about 5% from a year ago at Will Leather
Goods, a Eugene, Ore.-based company that sells handcrafted leather
accessories. The company, which employs about 250 people, also
plans to open two new retail shops this year, in addition to its
six stores around Oregon and in New York City and Los Angeles.
"Now is the time where the back-to-school and holiday season is
upon us, " said Chief Executive Will Adler. "I would expect
[growth] to be double digits before the year is up."
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 solid 6.6% pace. However, that gain comes after two
quarters of at least 10% growth.
Among other positive signs in the GDP report, government
spending rose modestly in the second quarter after falling earlier
this year, reflecting higher spending by state and local
governments.
And trade, which had dragged down the GDP number for four of the
previous five quarters, added to economic output in the second
quarter. 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. Taken together, the figures added 0.13 percentage point
to GDP, compared with the previous quarter, when net exports
subtracted 1.92 percentage points--the biggest quarterly drag in
more than three decades.
Yet for all the positives, the economy still doesn't seem to be
operating on all cylinders. One persistent weak spot has been
business investment, which actually subtracted from GDP growth in
the second quarter for the first time since 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 slowdown reflects a sharp drop in spending on structures, as
energy firms have scaled back their investment plans this year
following a steep drop in oil prices that began in mid-2014. Prices
appeared to have stabilized, but have started to slip again in
recent weeks, a sign that those pressures could continue to weigh
on growth in the second half.
The outlook for the rest of 2015 remains challenging for Cloud
Peak Energy, a Gillette, Wyo., firm that mines coal in the Powder
River Basin.
"Low natural-gas prices, reduced demand and excess capacity
continue to put downward pressure on domestic prices," CEO Colin
Marshall told analysts Wednesday during an earnings call, adding
that he doesn't expect prices to rise until those market factors
balance out.
Still, many economists are predicting stronger growth in the
second half, including an even bigger boost from consumers if wages
continue to accelerate and employers continue to add jobs at a
robust pace. For example, forecasting firm Macroeconomic Advisers
put its third-quarter growth estimate at 2.6%, while J.P. Morgan
Chase is expecting a 2.5% gain.
For Fed officials, who on Wednesday upgraded their assessment of
the economy, the GDP report offered signs of firming inflation,
another key gauge of the economy's health.
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%.
The Fed has said it wants to see inflation moving toward its 2%
goal before committing to timing on raising interest rates.
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