U.S. growth bounces back in second quarter

Rebound comes after first-quarter slump but stocks take a hit as early rally fades before a Federal Reserve decision on monetary policy

PUBLISHED : Thursday, 31 July, 2014, 1:24am
UPDATED : Thursday, 31 July, 2014, 5:19am
SL

Share

US economic growth accelerated more than expected in the second quarter and the decline in output in the prior period was less steep than previously reported, bolstering views for a stronger performance in the last six months of the year.

Gross domestic product expanded at a 4 per cent annual rate as activity picked up broadly after shrinking at a revised 2.1 per cent pace in the first quarter, the Department of Commerce said.

That pushed GDP above the economy's potential growth trend, which analysts put somewhere between a 2 per cent and 2.5 per cent pace.

US stocks fell for a second day as an early rally sparked by better-than-forecast economic growth faded before a Federal Reserve decision on monetary policy.

The Standard & Poor's 500 Index fell 0.2 per cent to 1,966.43 points in mid-morning trade, after rising as much as 0.5 per cent earlier. The Dow Jones Industrial Average lost 67.16 points, or 0.4 per cent, to 16,844.95. The Nasdaq 100 Index increased 0.2 per cent.

"The GDP number was great, but the general concern is that we're ahead of ourselves and let's be sure before we keep marching forward," said Tom Sudyka, president of Lawson Kroeker Investment Management. "That cautiousness is probably keeping us from getting really bullish."

Three rounds of monetary stimulus from the Fed have helped fuel a five-year bull market as the S&P 500 almost tripled from 2009. The gauge, which has gone without a 10 per cent correction since 2011, is up 6.5 per cent this year and trades at 18 times reported earnings, near the highest level in four years.

Equity markets will see a decline at some point after surging for the past several years, according to former Fed chairman Alan Greenspan.

"The stock market has recovered so sharply for so long, you have to assume somewhere along the line we will get a significant correction," Greenspan said yesterday. "Where that is, I do not know."

Pacific Investment Management's Bill Gross said investors should say "good evening" to the prospect of future capital gains in asset markets as interest rates are set to rise while the economy grows at a slow pace.

A separate report yesterday showing private employers added 218,000 jobs to their payrolls last month, a decline from June's hefty gain of 281,000, did little to change perceptions the economy was strengthening.

The economy grew 0.9 per cent in the first half of this year and growth for 2014 as a whole could average above 2 per cent. The first quarter contraction, which was mostly weather-related, was the largest in five years.

The GDP data, which was released only hours before Fed officials conclude a two-day policy meeting, could fuel debate on whether the central bank may need to raise interest rates sooner than had been anticipated.

 

Reuters, Bloomberg