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US GDP growth rebounds to 4.0% in 2nd quarter

Construction workers build the $1.05 bn Brickell CityCentre condo/retail mix use complex on July 7, 2014 in Miami
Construction workers build the $1.05 bn Brickell CityCentre condo/retail mix use complex on July 7, 2014 in Miami

The US economy rebounded vigorously in the second quarter, growing at a peppy 4.0 percent pace that erased the impact of the sharp winter contraction, the Commerce Department reported Wednesday.

The initial estimate of second-quarter growth was far better than most analysts had expected and showed solid rebounds in private investment and consumer spending, especially on durable goods like cars and appliances.

In addition, government spending, which dragged on gross domestic product for the last six quarters, added to the expansion.

That suggested that the severe weather and a modest slump in confidence between December and March were indeed behind the winter slowdown, as economists have said.

"This is not just a case of better weather. There is evidence to indicate that there has also been an underlying improvement in the economy, and that robust growth will be sustained into the third quarter," said Chris Williamson, chief economist at Markit.

Dan Fortune installs a door install on a Ford F-150 truck on the assembly line at the Ford Dearborn Truck Plant June 13, 2014
Dan Fortune installs a door install on a Ford F-150 truck on the assembly line at the Ford Dearborn Truck Plant June 13, 2014

In a further sign that the world's largest economy is stronger than earlier thought, the department revised upward its estimates of growth over the previous quarters.

It said the January-March contraction was only 2.1 percent, compared to the more severe 2.9 drop percent previously reported, and it upped its estimate of growth in 2013 to 2.2 percent from 1.9 percent, due to a much stronger second half.

- Fresh pressure on Fed -

The improved data could increase pressure on the Federal Reserve, which was holding a monetary policy meeting on Wednesday, to rethink its plans to increase interest rates only in the second half of 2015.

Shoppers visit stores along a section of Michigan Avenue known as the Magnificent Mile on July 29, 2014 in Chicago, Illinois
Shoppers visit stores along a section of Michigan Avenue known as the Magnificent Mile on July 29, 2014 in Chicago, Illinois

Some economists, including those particularly concerned that the Fed's easy-money policies are pumping up inflation and price bubbles in asset markets, say the central bank should accelerate that plan to early 2015.

Underpinning their view is the surge in hiring over the first half of the year. Job creation over the first half was the strongest since 2007, averaging 231,000 new positions each month and pushing the unemployment rate down to 6.1 percent.

Data from payrolls company ADP Wednesday showed private-sector job growth remained at a solid pace in July, with a net 218,000 new jobs.

Analysts think those gains could begin to show up in a tighter jobs market and larger paychecks for workers, boosting consumer spending and fueling inflation.

But others expect the Fed to stand pat on policy for the moment, forecasting the pace of growth to ease somewhat -- to 3.0 percent or so -- in the second half of the year and arguing that, despite an uptick in prices, inflation remained tame.

"The economy will have to sustain a growth rate of more than 3.0 percent over the second half of the year just to reach 2.0 percent growth for the year as a whole," said Dean Baker at the Center for Economic Policy and Research.

Chris Low of FTN Financial said the sharp swings in the growth numbers, and the revisions, mean officials need more data from the current period to confirm the economy's strength before changing course.

"There's just no way Fed officials can process the GDP data in a meaningful way today. As a result, today's (Fed policy) statement will be a placeholder with real decisions put off until September."

The strong data gave the dollar a boost to its highest level against the euro since November, at one euro to $1.3377. The dollar also surged to 102.81 yen, the highest since April.

After opening higher on the growth numbers, US stocks were down in late-morning trade, the S&P 500 off 0.13 percent.

The bond market was also cautious, in advance of the release of the Fed's policy statement. Ten-year Treasury yields were up 0.2 percentage point to 2.51 percent, still well below the year's high of almost 3.0 percent.

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