Real GDP Grew at a 4-Percent Pace in the Second Quarter

Real GDP grew at a 4.0-percent annual rate during the second quarter and revisions to previously-reported data show the recovery started more slowly than first reported, but has gained more momentum recently.

Economic Growth Is Back on Track

Any concerns that the first quarter’s drop in real GDP growth was a harbinger of tougher days ahead have been laid to rest by this morning’s advance estimate of second quarter real GDP, which showed the economy grew at a 4.0-percent pace. The figures also include revisions for the previous three years. The revisions reduced the extent of the first quarter’s decline to a 2.1 percentage point decline from 2.9 percent, and generally show the economy growing at a more solid pace over the past year. 

The strong bounce back in second quarter real GDP growth is not a huge surprise. Declines in real GDP during an expansion are fairly rare, having occurred only ten times since World War II. The average bounce back in real GDP growth from those drops has been 3.7 percent. 

While the recent volatility in quarterly GDP growth makes for good headlines, the more important takeaway from this morning’s GDP data is that the underlying trend of economic growth is stronger than had been initially reported. The quarterly numbers during this period have been buffeted by huge swings in inventories and international trade, which makes the trend difficult to interpret. Real GDP has expanded at a 2.4-percent pace over the past year, compared to a 2.1-percent pace averaged during the first four years of the recovery. Real final sales to private domestic purchasers, our preferred measure of domestic demand, has increased 2.8 percent over the past year, compared to a 2.6-percent pace in the previous four years.

Consumer spending and business fixed investment in equipment & structures are modestly stronger over the past year than previously reported, and both gained momentum in the second quarter. Consumer spending grew at a 2.5-percent pace, with spending on durable goods soaring at a 14.0-percent pace. About half of that gain was in motor vehicles & parts, but spending also rose solidly in other major categories, including furniture and appliances. Spending on nondurable goods rose at a 2.5-percent pace, which was better than expected. Outlays on services increased at just a 0.7-percent pace, possibly reflecting the recent slowdown in home sales. Services outlays have been the source of much of the variation in the quarterly GDP numbers recently due to difficulty computing the impact of the Affordable Care Act on health care spending.

Business fixed investment in equipment rose at a 7.0-percent annual rate in the second quarter and spending on structures rose at a 5.3-percent pace. Data for these categories were revised modestly higher over the past year, confirming the better real-time data as well as recent anecdotal reports. Residential construction also bounced back, with outlays rising at a 7.5-percent pace in the second quarter. The revised data, however, now show slightly larger declines during the previous two quarters