U.S. GDP Growth Revised Up to 3.0% Pace in Second Quarter

By Ben Leubsdorf and Sarah Chaney Features Dow Jones Newswires

U.S. economic growth was stronger than initially thought during the second quarter, a sign of momentum headed into the second half of 2017.

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Gross domestic product, a broad measure of the goods and services produced across the U.S., rose at a seasonally and inflation-adjusted annual rate of 3.0% in the second quarter, the Commerce Department said Wednesday. That was the strongest quarter of growth since the first quarter of 2015.

The agency in late July estimated last quarter's growth rate at 2.6%. Economists surveyed by The Wall Street Journal had expected a smaller upward revision to 2.8% growth.

The more robust GDP reading reflected stronger consumer spending and business investment, offset in part by a steeper pullback in spending by state and local governments.

Wednesday's report included the government's first estimate for profits at U.S corporations during the second quarter. After-tax profits, without inventory valuation and capital consumption adjustments, fell 1.4% in the second quarter after rising 1.3% in the first quarter.

Second-quarter profits were up 8.1% from a year earlier.

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Corporate profits deteriorated in 2015 as falling oil prices squeezed the domestic energy industry and a strong dollar damped demand for U.S. exports. But earnings began to recover last year as crude prices stabilized, and exporters are getting a boost because the dollar has weakened since early 2017.

A separate earnings measure produced by the Commerce Department, pretax profits with inventory valuation and capital consumption adjustments, rose 1.3% last quarter after falling 2.1% in the first three months of 2017, and was up 7.0% over the past year.

The U.S. economy picked up momentum in the spring after growing at a modest 1.2% annual pace in the first quarter. Overall growth is expected to remain healthy in the current quarter; both forecasting firm Macroeconomic Advisers and the Federal Reserve Bank of Atlanta's GDPNow model were predicting a third-quarter growth rate of 3.4% ahead of Wednesday's report.

"Persisting job and income gains should continue to drive disposable income growth, and favorable revolving credit usage continues to hover near the highest rates of the current economic expansion, supplementing the spending power generated by stronger incomes," Lowe's Cos. Chief Executive Robert Niblock told analysts last week. The home-improvement retailer said it expects a 3.5% rise in same-store sales this year.

The economic expansion, already the third-longest in U.S. history, remains on track in its ninth year. But despite short-term fluctuations, growth has averaged a little over 2% a year since the recession ended in mid-2009, and there is little sign of any imminent breakout from that historically modest pace.

President Donald Trump has said he wants to lift annual economic growth above 3% in a sustained fashion by rolling back regulations, overhauling the tax code and enacting other policy changes.

Still, many forecasters expect continued modest growth in the coming years. Federal Reserve policy makers' median projection in June was for 2.2% growth this year, followed by 2.1% growth in 2018 and 1.9% growth in 2019.

"Even as we see daylight in today's economy, we find ourselves in the shadow of daunting longer-term challenges to economic growth and shared prosperity," Federal Reserve Bank of San Francisco President John Williams said in an Aug. 2 speech. "These include a sea change in demographic factors like slowing population and labor force growth and a downshift in productivity growth."

Wednesday's report showed consumer spending, which accounts for more than two-thirds of U.S. economic output, rose at a 3.3% annual rate in the second quarter, up from an earlier estimate of 2.8%.

Jodi Taylor, chief financial officer at the Container Store Group Inc., said the retailer has seen solid growth in the higher-ticket portion of its business. "We're of the opinion that the customer is still spending," Ms. Taylor told analysts earlier this month.

Business investment also was stronger than initially thought. Fixed nonresidential investment rose at a 6.9% pace last quarter, up from an initial estimate of 5.2%, including stronger spending on software.

Government spending fell at a 0.3% pace in the second quarter, with growth in military expenditures offset by declines in federal nondefense spending and outlays by state and local governments. The 1.7% decline in state and local government spending was the sharpest pullback in the category since late 2012.

The housing sector was a drag on overall growth during the spring, largely offset by positive contributions to GDP growth from private inventories and net exports.

The Commerce Department's latest GDP report can be accessed at: https://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Write to Ben Leubsdorf at ben.leubsdorf@wsj.com and Sarah Chaney at sarah.chaney@wsj.com

(END) Dow Jones Newswires

August 30, 2017 08:45 ET (12:45 GMT)