The economy grew faster than expected in the spring, according to data released Wednesday, easing fears that government spending cuts would weaken the recovery’s momentum.
The nation’s gross domestic product increased at a 1.7 percent annual rate during the second quarter, almost twice as fast as many economists had predicted. The data from the Bureau of Economic Analysis showed that consumer spending remained strong despite higher taxes and that businesses ramped up their investments in inventory. The real estate market, both residential and commercial construction, was also essential to the expansion.
“Given the worries that we had, this is a real plus,” said Beth Ann Bovino, senior economist at Standard & Poor’s, who said she had been nervous that her own forecast of 1.4 percent growth was too high. Some economists had even floated the possibility that the recovery flatlined.
That said, the pace of economic growth remains far below pre-
recession levels. In a statement, the Federal Reserve characterized the pace as “modest” in the first half of the year. The central bank wrapped up its regular policy-
setting meeting in Washington on Wednesday and said it would continue to spend $85 billion a month on long-term bonds to boost the recovery.
The Fed pointed to the housing rebound as a bright spot in the economy but also noted for the first time the recent rise in mortgage rates. And it continued to cite fiscal policy as a drag on growth.
Still, the reductions in government spending were not as painful as expected. Federal budget cuts lowered GDP by just one-tenth of a percent last quarter after shaving off more than one percentage point at the end of 2012.
In addition, there were signs that the economy may have picked up more steam since spring. A private estimate of labor market growth by human resources provider ADP that was also released Wednesday morning showed the country added 200,000 jobs in July. It marks the second month of strong job creation, with hiring by small businesses driving the increase.
The ADP report revealed a pickup across a broad range of industries. Professional and business services added 49,000 jobs, the most of any sector. But trade, transportation and utility jobs also boomed. The construction industry added 22,000 positions, more than the previous month. Manufacturing continued to slip, however, losing 5,000 jobs.
“Job growth remains remarkably stable,” said Mark Zandi, chief economist at Moody’s Analytics, which compiled the ADP report. “The job market has admirably weathered the fiscal headwinds, tax increases and government spending cuts. This bodes well for the next year when those headwinds are set to fade.”
The ADP report is viewed as a bellwether for the government’s monthly estimate of job growth and unemployment, which is slated to be released Friday. That data will help shape the Fed’s decision on when to begin scaling back its support for the economy.
Chairman Ben S. Bernanke said last month that the central bank would probably begin winding down its bond-buying program later this year if the job market continues to improve and the economy expands. He said the Fed could end the program altogether when the unemployment rate hits 7 percent, which is expected to occur in mid-2014.
But Bernanke cautioned that the timeline would adjust to incoming economic data. A weaker recovery could force the central bank to extend the purchases, while more robust growth could accelerate its plans.
Some economists anticipated that the better-than-expected GDP report, if coupled with encouraging data in the job market, could encourage the Fed to pull back its support for the economy sooner.
“The takeaway for the Fed today is that the economy is improving,” said Eric Green, global head of research for rates and foreign exchange at TD Securities. “The Fed will focus on the pattern of growth.”
Nonetheless, the Fed warned that the recovery continues to face several risks, including weak inflation. Officials acknowledged for the first time that persistently low inflation could stymie growth but emphasized that they still expect prices to rise over the medium term.