The American economy was considerably stronger in the second quarter than an earlier estimate showed, but the figures aren’t delighting investors. Problem is, any numbers that show a firmly rooted recovery will raise expectations for the Federal Reserve to stop propping up the markets.
Gross domestic product, the broadest snapshot of an economy’s activity by measuring the goods bought and sold, increased by 2.5% in the second quarter, new Commerce Department data shows. The government offers three estimates of GDP–this is the second, and it’s sharply higher than the 1.7% growth figure from the original report.
Why the change? The U.S. exported more and imported less than originally thought. At the same time, business investment greatly increased, and the housing market continues to show signs of a robust recovery.
What is most striking about the second quarter GDP number is that it’s more than double the pace from the prior three months. The U.S. grew only by 1.1% in the first quarter, according to final estimates, and economists had thought the second quarter would be even more dismal, forecasting just 1% growth when the government provided its initial GDP estimate. Higher taxes and government spending cuts have been considerable drags on the economy to start the year, though economists generally believe the second half will be significantly stronger
Predictions of a robust end to 2013, along with a better-than-expected second quarter, explains why observers think the Fed will begin to end the major economic stimulus program that has stretched on for years. Indeed, the brighter second-quarter figures will likely reinforce the central bank’s belief that it’ll be able to start reducing its bond-buying program next month. “It’s no certainty,” warns Capital Economics’ Paul Ashworth. “August’s payroll figures will be watched closely.” He adds, “We still think the Fed will begin tapering its monthly asset purchases…the upward revision to second-quarter GDP growth should give officials more confidence that the recovery is gathering steam.” Less money artificially pumped through the financial system will startle investors accustomed to the Fed’s presence in the market and the central bank’s easy money policies.
For this reason, this morning’s trading was decidedly choppy after investors saw the new government GDP data. Stocks cut a portion of their early morning gains, with Dow Jones industrial average futures rising 33 points. Nasdaq composite futures increased 9.5 points, and S&P 500 futures went up 2 points.
In corporate news, Verizon Communications VZ +2.71% shares were quickly trading hands after a report that the telecom giant had entered discussions with Vodafone VOD +8.02% to buyout Vodafone’s stake in Verizon Wireless, the key part of Verizon Communication’s business. Verizon Communications rose 7.8% to $50.
Campbell Soup CPB -3.09% fell 2.7% on disappointing quarterly figures. Other losers included Newmont Mining NEM +1.56%, which fell 0.5% to $31.20, and Lowe’s Companies’ 0.4% decline to $46.20.
Meanwhile, GameStop rallied 1.4% to $50.30.
Reach Abram Brown at firstname.lastname@example.org.