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Economic growth revised up to 2.5 percent in second quarter

The U.S. economy expanded faster this spring than previously reported, according to government data released Thursday morning, boosted by a spike in exports and business investment.

The nation’s gross domestic product increased at a 2.5 percent annual rate during the second quarter, according to the Bureau of Economic Analysis, a significant step up from the initial estimate of 1.7 percent. The report offered an optimistic offset to recent data showing a slowdown in the housing market. But economists warned that the factors driving the better performance were unlikely to be repeated later this year.

“The case for an improvement in economic growth can still be made,” said James Marple, senior economist at TD Bank. “However, the counter evidence is also growing.”

Still, investors welcomed the news, sending the Dow Jones Industrial Average and the broader Standard & Poor’s 500-stock index up more than half a percentage point in morning trading. The tech-heavy Nasdaq rose more than 1 percent.

The revised data showed exports jumped at an 8.6 percent rate in the second quarter after falling at a pace of 1.3 percent earlier in the year. Meanwhile, the increase in imports showed a smaller uptick, narrowing the trade deficit.

In addition, businesses stockpiled inventory, boosting economic growth by 0.6 percent. The government data also showed corporate profits rising 3.9 percent to reach an all-time high during the second quarter of more than $2 trillion at an annualized rate.

PNC Chief Economist Stuart Hoffman said inventory growth during the third quarter will likely be muted after such a large jump over the spring. Though he cautioned that consumer and business demand remained soft, he still expects the economy to pick up steam through the end of this year and early next year.

“Consumers are adjusting to higher taxes,” he said. And over time, “business investment will continue to improve as profits are at a record high and borrowing costs are still very low, despite the recent increase in rates.”

The rosier GDP report provided support for gains in job growth in recent months that economists worried could not be sustained. The job market showed more improvement last week, the Labor Department reported Thursday. The number of people filing for new unemployment benefits fell by 6,000 to 331,000.

“The apparent disconnect between employment and GDP will be closed with GDP moving up rather than employment down,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics. “Some, but not all, of the disconnect was revised away today.”

The revised data will help shape the Federal Reserve’s assessment of the health of the economy. The nation’s central bank is debating when to begin scaling back its multibillion-dollar stimulus program but does not want to jeopardize the recovery. Though officials tied the monthly purchases of $85 billion in bonds to the outlook for the labor market, they have also said that the job gains must be accompanied by economic growth.

The Fed’s most recent forecast estimated economic expansion between a 2.3 percent to 2.6 percent annual rate this year. To achieve that, GDP would have to increase by 2.8 percent to 3.4 percent during the second half of the year, according to Marple.

“This is a high hurdle to jump,” he said. “This could lead [officials] to reconsider how quickly they withdraw policy support.”

The government will issue its third and final revision to second-quarter GDP next month.

Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.



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