The U.S. economy is rolling now.
Gross domestic product expanded at an annual rate of 4.2 per cent in the second quarter, according to the Commerce Department's updated estimate, defying Wall Street's consensus assumption that closer inspection would force Commerce to shave its initial 4-per-cent estimate. A separate report Thursday showed the four-week moving average of initial jobless claims dropped to 300,000, a historically low number that correlates with a declining unemployment rate.
This is the United States economy the world has been waiting for since the end of the Great Recession. The first-quarter contraction of an annualized rate of 2.1 per cent clearly was a weather-induced anomaly. GDP in the U.S. expanded at annual rates of 4.5 per cent in the third quarter of 2013 and 3.5 per cent over the final three months of the year. The latest monthly indicators suggest the world's largest economy will advance at an annual rate in excess of 3 per cent over the remainder of the year, so long as nothing serious happens that would knock everything off the rails.
Economists love to look past the headline number. When they went looking Thursday, they found evidence of strength, not weakness. One item generating the most hope about strength ahead is inventories, which contributed 1.39 percentage points to growth in the second quarter. That's actually a lesser contribution than Commerce calculated initially. And that's a good thing because "inventories will be less of a drag on growth in the second half of this year, as businesses are less concerned about having too much stock on hand," Stuart Hoffman, chief economist at PNC Financial Services Group, said in a report. Stockpiles have a tendency to swing, contributing to growth one quarter, and then stealing from it the next as companies reduce orders and sell from the inventory they already have. Thursday's report suggests inventories may continue to contribute to growth over the remainder of the year.
U.S. exports surged 10.1 per cent in the second quarter after plunging at an annual rate of 9.2 per cent in the first quarter. That's stronger than Commerce first reported, reducing the slight drag of total trade on economic growth. Exports add to GDP and imports subtract from it. Imports grew at an annual rate of 13.8 per cent in the quarter, outweighing the gains from exports, but signalling healthy demand in the world's largest economy.
The most important lines in the report for Canada are the ones related to investment. The Bank of Canada has identified 15 industry groups that likely will lead Canada's long-awaited export recovery. Many of those correlate closely with U.S. business spending. Non-residential investment grew at an annual rate of 8.4 per cent in the second quarter, compared with 1.6 per cent in the first quarter. Investment in equipment surged 10.7 per cent. Residential investment, which also will figure prominently in Canada's export revival because of the relative weight of the forestry industry, expanded at an annual rate of 7.2 per cent after posting declines in the previous two quarters.
If there is a negative in the second-quarter GDP numbers, it is government spending. Washington's outlays declined at an annual rate of 0.9 per cent. Federal spending now has contributed to GDP in only three quarters since 2010. That's unheard of during an economic recovery and it one of the main reasons the U.S. has struggled so mightily since the Great Recession. But austerity mania gripped the Republican Party in 2010 as its Tea Party wing determined the reason the economy was growing so slowly was that Washington was spending too much money. Ben Bernanke, the former chairman of the Federal Reserve, pleaded with Congress to go easy on austerity in the present to help the economy recover, and then clamp down when growth was back on track. Congress didn't listen.
However, government spending actually contributed 0.27 percentage points of the 4.2-per-cent rate of growth in the second quarter, the second-biggest contribution since the end of the recession. States and municipalities are spending again. With the exception of the first quarter, state and local government spending has been growing since the start of 2013. The 2.9-per-cent gain in the second quarter was the biggest since before the crisis.
There is activity everywhere the eye can see in the U.S., with the notable exception of Capitol Hill.