The U.S. economy rebounded sharply in the spring, growing at the fastest pace in more than two years amid brisk consumer spending on autos and other goods.
In the April-June quarter, gross domestic product — the broadest measure of economic health — grew at an annual rate of 3%, the U.S. Commerce Department reported Wednesday. The growth rate in the January-March quarter was a lacklustre 1.2%.
The second-quarter GDP estimate is the best showing since a 3.2% gain in the first quarter of 2015.
The result is a healthy upward revision from the government’s initial estimate of 2.6% growth in the second quarter.
Paul Ashworth, chief U.S. economist at Capital Economics, said the strength in consumer spending should result in an “even stronger hand-off” for growth going into the current quarter. He predicted GDP would grow close to 3% this quarter.
Consumers still in driver’s seat
For the second quarter, the government estimated that consumer spending grew at a 3.3% rate, the best showing in a year and up from an initial estimate of 2.8% growth. Much of the strength came from a sharp upward revision in spending on autos, which the government initially estimated as declining in the spring.
Investment by businesses also improved to growth of 6.9%, reflecting higher spending on structures, equipment and intellectual property.
Spending by governments, which had grown 0.7% in the initial estimate, was revised to a decline at a 0.3% rate. The downgrade reflects a 1.7% fall in spending by state and local governments.
The upgrade in GDP “has been somewhat positive for the U.S. dollar and negative for fixed income,” says Royce Mendes, director at CIBC Capital Markets, in an economics note. This morning, Bloomberg shows the U.S. dollar up 0.80% against the loonie, at $1.26.
This was the second of three estimates the government will provide for second-quarter growth. Even with the upward revision, the weak start to the year means that growth over the past six months has averaged 2.1%, the same modest pace seen for the recovery that began in mid-2009.
Economists forecast strong annual GDP — but not Trump’s 3%
During last year’s presidential campaign, Donald Trump attacked the Obama administration’s economic record, pledging to double GDP growth to 4% or better. His first budget, sent to Congress earlier this year, projects growth rates will climb to a sustained annual rate of 3%, a goal that many private economists believe is still too optimistic.
The nonpartisan Congressional Budget Office sees growth averaging 1.9% over the next decade, a forecast much closer to estimates made by private economists.
Many economists had been forecasting growth in the current July-September quarter would be around 3%. Some are now saying that the devastation from Hurricane Harvey could shave about a half-percentage point off growth this quarter. However, analysts believe the pace of growth will bounce back once the rebuilding begins and oil refineries get back to full production, bringing down prices.
BMO senior economist Sal Guatieri isn’t revising the bank’s forecast for GDP in Q3.
“If not for the uncertain impact of Harvey, we would be tempted to raise our current 2.4% estimate for Q3 GDP growth,” he says in an economics update. “On a yearly basis, growth of 2.2% is in line with the post-recession norm, and, importantly, still above potential, implying further downward pressure on the jobless rate.”
Last year the economy grew a meagre 1.5%, the poorest showing since 2009 when GDP shrank by 2.9%.
Mark Zandi, chief economist at Moody’s Analytics, forecasts annual growth of 2.1%.
Zandi forecasts that growth in 2018 will be an even stronger 2.8%. But he said a 0.4 percentage point of that forecast reflects an assumption that the Trump administration will win a tax cut package that will take effect in early 2018.
The economy will also be boosted by higher spending on the military and infrastructure projects, Zandi said.
“For the first time since the Great Recession ended in mid-2009, the economy is not facing any significant headwinds,” Zandi said.