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Leader of the pack: The US economy’s second quarter went from solid to stellar

Published:Thursday | August 27, 2015 | 8:43 PM

The United States economy staged a far bigger rebound last quarter than first thought, outpacing the rest of the developed world and bolstering confidence that it will remain sturdy in coming months despite global headwinds.

The economy as measured by gross domestic product expanded at an annual rate of 3.7 per cent in the April-June quarter, the Commerce Department reported Thursday.

That's more than a percentage point greater than the initial 2.3 per cent estimate and a sharp upgrade from the anaemic 0.6 per cent advance during the January-March quarter.

To be sure, the GDP report provides a backward look at the US economy. Since the spring, it has been hit with deepening concerns about a slowdown in China and recent turbulence in global financial markets. It remains unclear how the U.S. will fare in the months ahead if developments abroad deteriorate.

The robust second-quarter numbers, however, indicate a level of growth unmatched by the rest of the developed world and a solid footing heading into the second half of the year.

"The US economy entered the current market turbulence with momentum, which will help it to shrug off the drag from China and other developing economies," said Diane Swonk, chief economist at Mesirow Financial.

In contrast, Japan – the world's No. 3 economy – shrank at an annual pace of 1.6 per cent in the second quarter. Germany eked out 0.4 per cent growth, while the United Kingdom expanded at a modest 0.7 per cent rate. France didn't grow at all.

The US economy will probably cool slightly in the third quarter, but economists still expect solid growth that should keep fuelling jobs and spending.

Paul Ashworth, chief U.S. economist at Capital Economics, projects GDP growth of 2.5 per cent in the current July-September quarter.

"The economy regained a massive amount of momentum in the second quarter and all the evidence from July's activity and employment data suggests that momentum continued into the third quarter," Ashworth said in a note to clients.

Mark Zandi, chief economist at Moody's Analytics, is forecasting the economy to grow around 2.8 per cent in third quarter and accelerate to a 3.5 per cent annual rate in the October-December period. But he said that is based on an expectation that the recent market turbulence will not inflict long-lasting damage on the economy.

"My forecast rests on the assumption that this is a garden variety market correction, with stock prices dropping by 10 percent from their recent high," Zandi said. "If we get a bigger decline of 20 per cent, then that will hurt consumption and housing, and we will not get the job growth we are expecting."

The revision for second-quarter growth was broad-based, reflecting more robust spending by consumers, businesses and government.

Consumer spending grew at annual rate of 3.1 per cent, up from a 1.8 per cent growth rate in the first quarter.

Business investment in structures and equipment was revised higher to show growth of 3.2 per cent instead of a decline. Housing construction jumped 7.8 per cent, up from an initial estimate of 6.6 percent growth. Businesses spent more to restock their store shelves as well.

Also fuelling growth were strong gains in state and local government spending, largely due to greater public construction outlays.

US stock markets shot up Thursday after the GDP report and a strong day across global financial markets. The Dow Jones industrial average closed up 369 points at 16,656, following a surge Wednesday when stocks rallied to snap a six-day losing streak that saw the Dow tumble about 1,900 points.

Before the recent financial market turmoil, many economists had assumed that signs of an improving US economy would lead the Fed to begin raising its key short-term rate at its September 16-17 meeting. Now many analysts say a September rate hike is probably off the table, at least for now.

"With the economy gaining strength... and labour markets marking further progress, the Fed should feel "compelled" to raise interest rates this year," said Sal Guatieri, senior economist at BMO Capital Markets. "Whether it moves in September will largely hinge on whether global financial markets settle down in the weeks ahead."

Analysts cautioned that there could be more turbulence ahead, in part because of unsettled conditions in China. Beijing has devalued its currency and taken other steps to address a major slowdown in its economy, the world's second-largest and a major global growth engine