The U.S. economy is gaining momentum and is poised for a stronger recovery later this year, according to new data Wednesday from the Commerce Department. The numbers also showed that 2012 was stronger than had been estimated.
Most mainstream economists had expected a second-quarter growth number below 1 percent, so the report from the Bureau of Economic Analysis showing an annual growth rate of 1.7 percent from April to June provided a positive surprise. It followed a private gauge of hiring called the ADP National Employment Report, which came in stronger than expected, with 200,000 new private-sector jobs in July over June.
The government also revised its growth figures going back five years, incorporating new data to find that the U.S. economy was stronger in 2012 than had been estimated earlier and the Great Recession wasn’t as deep as had been thought.
For all those upbeat factors, the Commerce Department also revised downward its estimate for growth from this January through March, to just 1.1 percent from its earlier estimate of 1.8 percent.
It means that for the first half of the year, the economy lumbered along at an anemic annual growth rate of 1.4 percent. Over the past three quarters, the economy has grown at an annual rate of just 0.6 percent.
“Growth was a bit stronger than anticipated in the second quarter, but has come to a virtual standstill since late last year. The tax increases and government spending cuts have weighed,” said Mark Zandi, the chief economist for forecaster Moody’s Analytics. “Despite the weak numbers, employment growth is holding up.”
The conflicting signs in the government data led the Federal Reserve to disappoint in a much-anticipated statement Wednesday at the close of its two-day meeting. Fed policymakers avoided committing to a timetable for ending controversial bond purchases of $85 billion a month, designed to provide an unconventional economic stimulus.
In its vague statement, the Fed said it “will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.”
This year’s end of a payroll tax holiday for all Americans and new taxes on the top 1 percent of earners are thought to have slowed consumption, but not as much as feared.
“Businesses appear to be looking through the temporary hit to the economy from the fiscal drag. This is encouraging, as … job growth should pick up later this year as the fiscal head winds fade,” Zandi said.
The continued drop in government spending due to the budget sequester has pulled against economic growth, although its negative effects were more subdued in the second quarter than in previous ones. Government spending fell 0.4 percent in the second quarter, after drops of 8.7 percent in the first quarter and 14.8 in the final three months of 2012.
“Government remains the continuing thorn in the side of the total economy,” said Gregory Miller, the chief economist for Atlanta-based SunTrust Banks, noting that Wednesday’s report marked “the 12th contraction in the past 15 quarters for a sector that is supposed to provide an extra boost when the private economy is weak.”
On a positive note, he said, consumers are weathering the higher payroll taxes and they saw “a rare boost in personal disposable income.”
A continued rebound in the housing sector was the biggest plus in Wednesday’s report. That might boost things in the months ahead.
“Residential real estate continues to do its thing, rising 13.4 percent (in the second quarter) after a 12.5 percent jump” in the first quarter, Neil Dutta, the head of U.S. economics for Renaissance Macro Research, wrote in a note to investors. “With single-family building permits climbing and much of the new homes sold not yet started, we suspect construction activity to accelerate” in the second half of the year.
Adding to the intrigue Wednesday, the government released a comprehensive revision of economic data that showed that the Great Recession wasn’t as steep as earlier estimates had suggested, and that the recovery has been a bit stronger than advertised.
The revisions include a new methodology for measuring pensions, a hot economic issue across the nation given the high degree of underfunding of corporate and public retirement systems.
The economic contraction from December 2007 to June 2009 was “slightly less severe” than previously understood, Brent Moulton, the associate director of national accounts for the Bureau of Economic Analysis, said Monday in an embargoed briefing.
Over the 18 months of the Great Recession, the real economic growth rate contracted at an annual rate of 2.9 percent, not the 3.2 percent estimated earlier. The cumulative rate of contraction was 4.3 percent, not the previously published rate of 4.7 percent.
“The revisions do not change the underlying narrative,” Dutta said. “This has been a slow recovery from a deep recession.”
Similarly, the expansion from the end of the Great Recession until the end of 2012 brought an annualized growth rate of 2.3 percent, better than the earlier estimate of 2.1 percent. And from the final four months of 2011 to the end of 2012, the economy grew at an annual rate of 2 percent, not the previously published estimate of 1.7 percent.
The revisions to what are known as the National Income and Product Accounts incorporate data that comes to the Commerce Department with a lag. That includes things such as certain Census Bureau economic surveys that happen on five-year intervals, tax data from the IRS and information from the Federal Reserve on financial services.
Wednesday’s revisions also mark the inclusion of new economic measurements designed to better capture the real-world economy. One involves a new method for calculating defined-benefit pensions promised to employees by corporations and state and local governments, more accurately recognizing problematic unfunded liabilities such as those that recently forced Detroit to declare bankruptcy.
The new definitions for measuring economic activity and some smaller statistical changes add up to the world’s largest economy being $559.8 billion larger in 2012 than earlier advertised.
The biggest change is the new treatment of the research and development spending by U.S. companies and the government. It accounted for about 70 percent of that $559.8 billion in additional economic activity, and it’s now treated as a fixed investment.