U.S. GDP Growth Revised Up to 3% -- 3rd Update

By Ben Leubsdorf Features Dow Jones Newswires

The U.S. economy expanded at its most robust pace in more than two years in the spring and appears to have momentum going into the second half of the year, supported by solid consumer spending and a pickup in business investment.

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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% in the second quarter, the Commerce Department said Wednesday. That was the strongest quarter in more than two years and some forecasters expect growth will remain around that pace in the third quarter.

Since the recession ended in mid-2009, economic growth has fluctuated from quarter to quarter while averaging a little more than 2% a year. It is far from clear that a sustained breakout from that modest pace was building as the expansion entered its ninth year; similar past accelerations have proven fleeting. But some promising trends are under way, including a global pickup in growth supporting exports, rising employment supporting household income and spending, and robust corporate profits and confidence, supporting investment.

For now, at least, there is little sign of an imminent downturn.

"Typically in a business expansion, you would see growth start to arc downward as we get later into the cycle," said Ellen Zentner, chief U.S. economist at Morgan Stanley. But so far, she said, the pace of growth has remained steady: "It's incredible to sustain this kind of momentum this far into a business expansion."

Wednesday's report was an upgrade from the 2.6% GDP growth pace the government had reported last month based on less-complete data. The upward revision reflected stronger household and business spending, offset in part by a sharper pullback in outlays by state and local governments.

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Hitting 3% growth was notable because 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.

"We just announced that we hit 3% in GDP. It just came out," Mr. Trump said Wednesday during an event in Springfield, Mo. "And on a yearly basis, as you know, the last administration during an eight-year period never hit 3%. So we're really on our way."

The quarterly GDP growth rate was above 3% eight times during President Barack Obama's eight years in office, and GDP growth exceeded 3% in four quarters on a year-over-year basis. The U.S. economy didn't have a full calendar year of 3% growth during the Obama administration.

Consumer, business and investor optimism have all jumped since Mr. Trump's election last year. Other forces supporting U.S. economic activity were under way well before Mr. Trump took office, including the falling unemployment rate, stabilization in oil prices and an upswing in global growth.

Many forecasters expect economic growth will remain modest in the coming years, shaped by long-term demographic and other forces including slow worker productivity growth. 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.

"It is absolutely possible at times to have growth fluctuate and hit 3%, but to sustain 3% would imply a much larger and faster growing labor force than we have and a higher rate of productivity," Ms. Zentner said.

Since the recession ended in mid-2009, the economy's quarterly growth rate has bounced as high as 5.2%, while at times output has briefly contracted. Over the past 12 months, GDP expanded 2.2%, roughly in line with the expansion average.

Looking ahead, some forecasters see more solid growth over the summer; forecasting firm Macroeconomic Advisers on Wednesday projected a 3.4% growth rate for the third quarter.

IHS Markit Chief Economist Nariman Behravesh warned Hurricane Harvey could cause volatility in economic indicators for the second half of 2017, potentially reducing third-quarter growth and raising economic activity in the fourth quarter.

The details of Wednesday's report on the second quarter were broadly positive, including the strongest consumer-spending growth in a year. Household outlays rose at a 3.3% annual pace last quarter, up from a 1.9% rate in the first three months of the year.

Home-improvement retailer Lowe's Cos. said last week it expected 3.5% growth in same-store sales this year.

"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," Chief Executive Robert Niblock told analysts.

Business investment was strong for a second-straight quarter, with fixed nonresidential investment rising at a 6.9% annual pace following 7.2% growth in the first quarter.

"Later in the business cycle, as the labor market has tightened and wage costs rise, the higher labor costs start to incentivize capex," Ms. Zentner said.

One weak spot in the second quarter: Spending by state and local governments fell at an annual rate of 1.7%, the sharpest pullback since late 2012. Public spending on infrastructure and other construction projects has slumped over the past few years.

Wednesday's report also 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, down from 11.8% annual growth in the first quarter but still robust.

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 this year.

--Sarah Chaney contributed to this article.

Write to Ben Leubsdorf at ben.leubsdorf@wsj.com

(END) Dow Jones Newswires

August 30, 2017 15:48 ET (19:48 GMT)