Economy grew faster than previously thought in Q2

WASHINGTON (AP) — The U.S. economy grew at an even faster clip in the spring than previously estimated. But that growth likely slowed in the summer, held back by global headwinds and turbulent financial markets.

The overall economy expanded at an annual rate of 3.9% in the April-June quarter, up from a previous estimate of 3.7%, the Commerce Department reported Friday. The new-found strength came from additional gains in consumer spending, business investment and residential construction.

The second quarter expansion in the gross domestic product, the economy’s total output of goods and services, was a marked improvement from an anemic 0.6% increase in the first quarter when the economy was battered by a harsh winter.

Economists estimate that growth in the third quarter has slowed to around 2.5%.

Yellen expects Fed to raise rates by year's end

The revision in second quarter growth was led by a boost in consumer spending, which expanded at a 3.6% rate, up from the previous estimate of a 3.1% advance. The stronger result reflected increases in spending on such consumer services as health care and transportation.

Business investment spending was revised higher, reflecting increased spending on structures and equipment. Residential construction grew at a 9.3% pace, even better than the 7.6% growth estimated last month.

Friday’s report was the government’s third and final estimate for second quarter growth. The initial look tabbed GDP growth in the spring at 2.3%, which was revised up to 3.7% last month.

Economists believe the subsequent slowdown in the summer will reflect a reduction by businesses in restocking their inventories.

Once unwanted inventories are worked down, the expectation is that growth will accelerate again in the final quarter of the year. Economists at Macroeconomic Advisors are forecasting GDP growth of 2.7% in the October-December period.

For the whole year, economists expect a modest gain of around 2.2%, in line with the modest growth seen during the six years of the current recovery. In 2014, the economy grew 2.4% after 1.5% growth in 2013.

Activity has been held back this year by a rise in the value of the dollar, which weakens sales of U.S. exports while making foreign goods more competitive in the United States.

Adding to the problems facing American manufacturers has been a significant slowdown in growth in China, a major market for U.S. products. The slowdown in China sent shockwaves through global financial markets as investors grew concerned that that the economic problems in China, the world’s second largest economy, could be even worse than previously believed.

All these developments contributed to a decision by the Federal Reserve last week to keep its key interest rate unchanged at a record low near zero, where it has been since late 2008.

However, Fed Chair Janet Yellen said Thursday that she still believed the Fed would start raising rates before the end of this year. While the central bank would continue to monitor developments abroad, she said that, “we do not currently anticipate that the effects of these recent developments” will be large enough to impact the Fed’s interest rate decisions.