News Column

Boost for US economy as output exceeds predictions with 4% surge

July 31, 2014

Dominic Rushe New York

The US economy bounced back strongly in the spring, to beat analysts' expectations with a growth rate equal to 4% a year.

Gross domestic product in the second of quarter of 2014 grew at a faster rate than the average of 3% predicted by economists. It was a strong comeback from the first three months of the year when the economy shrank by 2.1%, according to the US Commerce Department.

Despite the good news the economic recovery remains the weakest since the second world war. GDP has grown by just 1% in the first six months of the year. The pick-up in the economy in late 2013 was wiped out by one of the harshest winters on record and even at 4% the pace of recovery remains sluggish.

The figures come as the federal open market committee concluded its latest two-day meeting. The Fed announced another $10bn (pounds 6bn) cut to its monthly quantitative easing (QE) economic stimulus programme. It is now buying $35bn of Treasury and mortgage backed securities a month to keep rates low and spur investment. The plan is to terminate the programme by the end of the year.

"Labour market conditions improved, with the unemployment rate declining further. However, a range of labour market indicators suggests that there remains significant underutilisation of labour resources," the Fed said in a statement.

US stock markets reacted calmly to the GDP news and Fed statement. "It shows the Fed is quite coolheaded about the strong GDP reading today," said Thomas Costerg, an economist at Standard Chartered bank.

"Overall the Fed remains prudent, but the gap between the hawks and the doves is growing, which might lead to more dissents in future meeting. A rate hike is on the horizon, but the Fed is in no hurry."

The Fed has kept interest rates at close to zero since the end of the financial crisis in 2008.

Analysts added that the GDP figures confirmed the one-off nature of the first quarter data. "We hold to our current view that the economy will expand by 3.0% or so in the back half of the year, interest rates should drift higher and the Federal Reserve will feel vindicated in exiting the asset purchase program," Dan Greenhaus, at broker BTIG wrote in a note to investors.

On Friday, the Bureau of Labour Statistics releases its latest closely watched tally of new jobs added to the economy. Last month the BLS said the US had added 288,000 jobs to the nonfarm payrolls report in June and unemployment fell to 6.1%, its lowest rate since September 2008. ADP, the America's largest payroll supplier, released its latest monthly jobs poll yesterday.

The report found private sector created 218,000 jobs from June to July, the fourth consecutive month of job gains topping 200,000 but lower than the 281,000 jobs added in the last report.

Mark Zandi, chief economist of Moody's Analytics, which helps compile the ADP report, said: "The July employment gain was softer than June, but remains consistent with a steadily improving job market. At the current pace of job growth unemployment will quickly decline. Layoffs are still receding and hiring and job openings are picking up. If current trends continue, the economy will return to full employment by late 2016."


Growth in the first six months of the year, suggesting the US recovery remains at its weakest since the second world war

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Source: Guardian (UK)

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