The U.S. economy grew strongly in the second quarter, up 4.0 percent and recovering from a very disappointing first quarter. With that said, the first quarter data was revised again, improving slightly from a decline of 2.9 percent to a decline of 2.1 percent. The second quarter data were higher than the consensus estimates and mostly reflected an economy that has rebounded from weaknesses earlier in the year, including winter disruptions. Still, real GDP growth in the first half of 2014 was soft overall, increasing just 0.9 percent.
Consumer and business spending were strengths in the second quarter. This is perhaps not a surprise given the softness seen in the first quarter and data released since then suggesting recovering levels of activity. On the consumer side, goods spending rose an annualized 6.2 percent in the second quarter, its fastest pace since the fourth quarter of 2010 but also reflecting a bounce-back from the 1.0 percent rate of the first quarter (when winter storms prevented people from going to the stores). Personal consumption added 1.69 percentage points to real GDP, with 1.38 percent stemming from goods spending.
Businesses provided the biggest boost to the economy in the second quarter, with higher levels of investment for structures, equipment and intellectual property. Housing was also a positive for the first time in three quarters. Gross private domestic investment added 2.57 percentage points to real GDP, rebounding from the 1.13 percent drag seen in the prior quarter. Inventory spending alone contributed 1.66 percentage points to the bottom line as firms restocked their shelves after letting them deplete in the previous two quarters. Indeed, inventory spending was so strong that it could slow the growth rate in the third quarter a bit.
Government spending added 0.30 percentage points to growth, but reduced defense spending was a drag at the federal level. State and local government investments returned to being a positive contributor to growth.
Export growth remained the primary weakness in the economy, subtracting from real GDP for the second straight quarter. While goods exports increased 2.3 percent at the annual rate for the quarter, this was more than outstripped by the 13.3 percent gain seen in goods imports. As a result, net exports subtracted 0.61 percentage points from real GDP in the second quarter.
Overall, the news was positive, with healthy increases in consumer and business spending helping to lift the economy in the second quarter. This suggests that we have begun to move beyond the softness seen in the disappointing first quarter. Yet, we also cannot help but note that 2014 has started off much weaker than we would have liked, with real GDP increasing by less than 1 percent in the first half of the year. While manufacturers remain mostly upbeat about the second half, it means that real GDP will once again settle in for an average of around 2 percent this year. That is not at all what we were thinking at the start of the year.
Also, the trade data suggest that we need to do more to increase manufactured goods exports. We have seen export growth continue to decelerate so far this year. This means that policymakers should consider policies that will aid manufacturers as they seek new markets. First and foremost, it means that we need to reauthorize the Export-Import Bank. (See our study released yesterday that shows the magnitude of foreign export credit activity overseas.). As a result, the United States would forfeit billions of dollars of export opportunities if we failed to reauthorize the Ex-Im Bank by September 30. The weak U.S. export data also mean that we need the President and Congress to work together expeditiously to enact new Trade Promotion Authority legislation that is critical to enable the United States to negotiate comprehensive and high-standard agreements in Europe and the Asia Pacific and elsewhere, which will boost U.S. manufacturing exports.