First GDP Data For Q2 2014 Show US Economy Was Stronger Than Previously Thought

by: Ed Dolan

Today's report from the Bureau of Economic Analysis shows the US economy to be much stronger than previously thought. The advance estimate for the second quarter of 2014 showed real GDP expanding at an annual rate of 4 percent. The new data revised the dip in GDP for Q1 from -2.9 percent to -2.1 percent, and raised the estimated growth rate for three out of four quarters in 2013. The following chart shows previously reported and revised data for the past seven years.

As the following table shows, the turnaround in the economy was very broadly based. Consumption contributed 1.69 percentage points to the growth of GDP, a little above the average of the past two years. Investment was very strong, contributing 2.57 percentage points to growth, far above its recent average. Both fixed investment and inventory investment reversed their declines of Q1.

The performance of the government sector was one of the big surprises. Government spending has been a negative factor in economic growth throughout much of the recovery. The federal government contribution to GDP growth, at -.05 percentage points, continued negative, but the contribution of state and local government turned around sharply, with a positive contribution of .35 percentage points.

Exports also returned to positive territory. Exports have been one of the few consistent bright spots throughout the recovery, so their dip in Q1 was especially disappointing. In contrast, the positive contribution to growth for Q2 of 1.23 percentage points was the strongest since Q4 2010, suggesting that some exports may simply have been delayed by bad winter weather. Imports enter the national accounts with a negative sign, so the -1.85 percentage point contribution to growth shown in the table represents an increase in import volume for Q2.

The rebound in Q2 GDP comes as no real surprise, given the improvements in the labor market that the Bureau of Labor Statistics has already reported, including a quarterly gain of 816,000 payroll jobs and a decrease in the unemployment rate from 6.7 percent in March to 6.1 percent in June. As usual, the advance estimate of GDP released today is subject to substantial revisions as more data come in, but so far, so good.

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