U.S. GDP Growth Revised Up to 3% -- 2nd Update

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

That was a pickup from early 2017 and an upward revision from the government's earlier estimate of 2.6% growth during the spring quarter. It marked the strongest quarter of growth since the first quarter of 2015.

Growth in the second quarter was "above the trend for the expansion" but came "after a below-trend pace" in the first quarter, said Jim O'Sullivan, chief U.S. economist at High Frequency Economics, in a note to clients. "The trend is probably still not much more than 2%," he said.

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.

Hitting the 3% mark for the first time in more than two years 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.

GDP growth tends to be volatile from quarter to quarter. Since the recession ended in mid-2009, the quarterly growth rate has bounced as high as 5.2%, while at times output has briefly contracted.

Overall, growth during the current expansion has averaged a little over 2% a year. That is in line with the 2.2% growth seen over the past 12 months.

Many forecasters expect continued modest growth in the coming years, shaped by long-term demographic and other forces. 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," said John Williams, president of the Federal Reserve Bank of San Francisco, 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 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.

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% 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. 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.

The pickup in business investment "reflects two important factors," said Stephen Stanley, chief economist at Amherst Pierpont Securities, in a note to clients. "First, domestic oil and gas production rebounded after sliding for most of 2015 and 2016. Second, businesses are starting to more aggressively spend on equipment. I believe this reflects heightened optimism regarding the economic outlook, both because the underlying economy is solid and because decision makers anticipate a more favorable policy backdrop."

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.

--Sarah Chaney contributed to this article.

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

WASHINGTON -- 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.

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.

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.

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.

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. Aftertax 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 14:17 ET (18:17 GMT)