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US economy grows robust 4.2% in Q2

The US Commerce Department raised its estimate for US economic growth to 4.2 per cent on Thursday (Aug 28), confirming the solid rebound from the first quarter's steep contraction.

WASHINGTON: The US Commerce Department raised its estimate for US economic growth to 4.2 per cent on Thursday (Aug 28), confirming the solid rebound from the first quarter's steep contraction.

The department said a fuller set of data showed a higher level of fixed investment by companies and the government, contributing to the 0.2 point upward revision from July's number. It also showed strong gains in corporate profits, possibly boosting the prospects for more hiring that would remove some of the persistent slack in the labour market.

Analysts said the revision improved the picture of the US economy for the rest of 2014, when added to recent monthly data on industry, hiring and general confidence. "While the impact of the revision on the IHS forecast is relatively small, the changes have positive implications for growth in the second half of this year," said Doug Handler at economic consultancy IHS Global Insight.

The 4.2 per cent annual pace in the April-June period followed a 2.1 per cent contraction in the first quarter, the consequence mainly of unusually severe winter storms that had battered the eastern half of the United States, depressing economic activity.

In the second quarter, the revised data showed pick-ups in consumer spending and business investment, and improved government spending and home building. On the other hand, gross domestic product was dampened by an increase in imports, not surprising given the rebound in activity after the first quarter, analysts say.

The new report left its key inflation indicator unchanged: the price index for gross domestic purchases stayed at 1.9 per cent, up from 1.4 per cent in the first quarter. The threat, or lack of, inflation has been key to debates over whether the Federal Reserve needs to tighten monetary policy sooner rather than later to prevent price increases from getting out of hand.

The report also showed that corporate profits and spending mostly recovered from the first quarter downturn. Jay Morelock of FTN Financial called that "a welcome development that will hopefully lead to hiring in the second half of the year". "Once wages follow the upward trend in business spending, a prosperous cycle could lift the economy toward the 3.0 per cent trend that remains a fixture of consensus forecasts and stock price assumptions."

The economy's rebound has not been uniform, as Federal Reserve Chair Janet Yellen has repeatedly pointed out. Though job creation has picked up, there remain a huge number of people underemployed or out of the labour market, and wages have remained fairly flat in the recovery from the 2008-2009 recession.

Jim O'Sullivan of High Frequency Economics pointed out that the revised data showed lower nominal growth in wages in the second quarter than previously estimated, 4.7 per cent year-on-year instead of 4.9 per cent. However, he said, "the data suggest that average hourly earnings are understating the extent to which tightness in the labour market is putting upward pressure on costs and boosting consumer spending power."

Economists took the report and other fresh data - including a pick-up in pending home sales in July that demonstrated the resilience of the housing comeback - and projected that the economy in the third quarter would grow at pace of 3.0 per cent or better. IHS stuck to its high 3.6 per cent forecast.

Markets, which after a run-up to record levels have been looking for any sign of growth at a pace that would ignite inflation and force the Fed to raise rates, fell slightly. The S&P 500 was down 0.2 per cent around midday; Treasury bond prices fell only marginally.