U.S. Economy Picks Up, but Stays in Its Rut

By Kate Davidson 

        The U.S. economy emerged from its winter lull with a moderate spring rebound, but the historically sluggish expansion is looking even more sluggish as it enters year seven.
        Gross domestic product, the broadest measure of goods and services produced across the economy, grew at a 2.3% seasonally adjusted annual rate in the second quarter, the Commerce Department said Thursday. And the economy actually expanded at a 0.6% pace in the first three months of the year, an upward revision from a previously reported 0.2% contraction.
        Yet further data revisions going back more than three years show the expansion--already the weakest since World War II--was even worse than previously thought, with GDP increasing at an average annual rate of 2% between 2012 and 2014, down 0.3 percentage point from prior estimates.
        While the first half's growth rate of 1.5% was better than expected thanks to the first-quarter revision, economic growth so far this year has been even slower than during last year's tepid first half and well below the pace of the overall recovery.
        Still, the modest growth figures are likely strong enough to keep the Fed on track to begin raising short-term interest rates as early as September for the first time in nearly a decade.
        But the latest GDP reading diminishes hopes for a long-awaited growth breakout year and seems to lend support for the Fed's plan to raise rates slowly over the next several years to ensure the economy doesn't falter or even tip into a recession. The figures also suggest the economy's growth potential is lower than previously thought.
        "It matters over time because the degree to which the economy can advance and people's standards of living can increase is a function of how fast the economy grows," said Stephen Stanley, chief economist at Amherst Pierpont Securities. The latest figures "mean the economy is going to grow more slowly...going forward."
        The latest figures repeat a familiar pattern over the past several years: a slump at the start of the year, followed by a bounce-back in the spring and summer.
        This year's tepid first quarter reflected a variety of factors that continued to weigh on output in the second quarter, including a stronger dollar, sluggish business investment and choppy consumer spending.
        But there are signs those pressures may be starting to ease. The housing market appears to be building momentum after years of uneven recovery. And the unemployment rate fell to its lowest level since 2008 in June, as U.S. employers added jobs for the 57th straight month--the longest stretch on record.
        Strong job gains and accelerating wage growth supported stronger household consumption in the second quarter, contributing two percentage points to the overall quarterly GDP number. Consumer spending, which accounts for more than two-thirds of economic output, rose 2.9% in the second quarter, compared with 1.8% in the first three months of the year.
        Consumers also appear to be spending some of the money they saved earlier this year on cheaper gasoline. The saving rate fell in the second quarter, to 4.8% from 5.2% in the previous quarter, while Americans spent more on long-lasting products including cars.
        Retail sales are up about 5% from a year ago at Will Leather Goods, a Eugene, Ore.-based company that sells handcrafted leather accessories. The company, which employs about 250 people, also plans to open two new retail shops this year, in addition to its six stores around Oregon and in New York City and Los Angeles.
        "Now is the time where the back-to-school and holiday season is upon us, " said Chief Executive Will Adler. "I would expect [growth] to be double digits before the year is up."
        Thursday's report also showed the housing market provided a boost to the economy in the second quarter, amid signs of strong activity during the spring selling season. Residential investment advanced at a solid 6.6% pace. However, that gain comes after two quarters of at least 10% growth.
        Among other positive signs in the GDP report, government spending rose modestly in the second quarter after falling earlier this year, reflecting higher spending by state and local governments.
        And trade, which had dragged down the GDP number for four of the previous five quarters, added to economic output in the second quarter. The rising dollar has pushed up the cost of American-made goods for customers overseas, while foreign products are cheaper in the U.S.
        In the second quarter, exports rose at a 5.3% rate, compared with a 6% drop in the first quarter. Imports, which subtract from GDP, rose 3.5%, versus a 7.1% increase in the first three months of the year. Taken together, the figures added 0.13 percentage point to GDP, compared with the previous quarter, when net exports subtracted 1.92 percentage points--the biggest quarterly drag in more than three decades.
        Yet for all the positives, the economy still doesn't seem to be operating on all cylinders. One persistent weak spot has been business investment, which actually subtracted from GDP growth in the second quarter for the first time since 2012. Nonresidential fixed investment--which reflects spending on software, research and development, equipment and structures--retreated at a 0.6% rate, compared with a 1.6% growth rate in the first quarter.
        The slowdown reflects a sharp drop in spending on structures, as energy firms have scaled back their investment plans this year following a steep drop in oil prices that began in mid-2014. Prices appeared to have stabilized, but have started to slip again in recent weeks, a sign that those pressures could continue to weigh on growth in the second half.
        The outlook for the rest of 2015 remains challenging for Cloud Peak Energy, a Gillette, Wyo., firm that mines coal in the Powder River Basin.
        "Low natural-gas prices, reduced demand and excess capacity continue to put downward pressure on domestic prices," CEO Colin Marshall told analysts Wednesday during an earnings call, adding that he doesn't expect prices to rise until those market factors balance out.
        Still, many economists are predicting stronger growth in the second half, including an even bigger boost from consumers if wages continue to accelerate and employers continue to add jobs at a robust pace. For example, forecasting firm Macroeconomic Advisers put its third-quarter growth estimate at 2.6%, while J.P. Morgan Chase is expecting a 2.5% gain.
        For Fed officials, who on Wednesday upgraded their assessment of the economy, the GDP report offered signs of firming inflation, another key gauge of the economy's health.
        The price index for personal consumption expenditures--the Fed's preferred measure for inflation--rose at a 2.2% pace in the second quarter. Core prices, which exclude food and energy costs, rose 1.8%.
        The Fed has said it wants to see inflation moving toward its 2% goal before committing to timing on raising interest rates.
        Corrections & Amplifications
        The Federal Reserve upgraded its assessment of the economy on Wednesday. An earlier online version of this article erroneously said the upgrade came Thursday.
        Write to Kate Davidson at kate.davidson@wsj.com
        (END) Dow Jones Newswires

        July 30, 2015 20:05 ET (00:05 GMT)

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