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US bounces back with 4% GDP growth in Q2

US bounces back with 4% GDP growth in Q2

The US economy grew at an annual rate of 4% during the second quarter, bouncing back from a 2.1% decline in the first three months of the year.

Consumer spending, exports and private inventory investment were cited as the main contributors to growth in the government's preliminary estimate.

The increase exceeded economists’ expectations and will likely support the view that the US economy is in recovery mode. Some will now see the first quarter disappointment as largely down to unusually dismal winter weather. 

Annual revisions were also released Wednesday and showed the economy expanded at a 4% rate in the second half of 2013, representing the best six-month stretch in 10 years. 

Ben Brettell, senior economist at Hargreaves Lansdown, said: 'This faster-than-expected Q2 expansion more than offsets the contraction in Q1 and shows the US economy is back on track. The rebound was driven by lower energy prices, strength in the manufacturing sector and increased demand for exports. A healthier labour market is boosting consumer confidence, which is at a near-seven-year high.

'However, the IMF and the Federal Reserve disagree on prospects for the year as a whole, with the IMF forecasting a disappointing 1.7% and the Fed a more optimistic 2.1%-2.3%.'

Capital Economics reacted to the news by upgrading its growth forecast from 1.7% to 2% this year.

'Looking at the second-quarter gain, consumption increased by 2.5%, driven by a 14% surge in durable goods consumption. Business investment increased by a solid 5.5%. Residential investment rebounded by 7.5%, presumably driven by a big recovery in brokers' commissions,' chief US economist Paul Ashworth noted.

He pointed out that for once the public sector wasn't a drag on the economy, with a 3.1% rebound in state and local government spending more than offsetting a 0.8% decline in Federal government spending.

'At the margin, this GDP report supports our view that an improving economy will persuade the Fed to begin raising rates in March next year,' Ashworth concluded.

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