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U.S. Economy Reverses Contraction, Grows 4% Annualized In The Second Quarter

Economists had been expecting 3% annualized growth — the big number turns the economy positive for the year.

Last updated on July 3, 2018, at 12:50 p.m. ET

Posted on July 30, 2014, at 8:46 a.m. ET

The U.S. economy has successfully turned around from an unexpectedly deep contraction earlier this year. The Commerce Department today reported that the economy's gross domestic product grew at a 4% annualized rate in the second quarter, more than making up for a 2.1% contraction in the first three months of the year.

Economists were expecting growth in the second quarter to come in at 3%. Also, the most recent data, which can be further revised in the future, showed that the first quarter's contraction was 2.1%, not the 2.9% reported last month.

The first quarter's dire growth data — the largest contraction not immediately prior to or during a recession — stood in contrast to the labor market, which continued its slow and steady expansion. While the economy shrunk at a 2.1% annual rate in the first three months of the year, the biggest decline since 2009, an average of 190,000 jobs were added per month. In the second quarter, the labor market started expanding even more with an average of 272,000 jobs created per month, indicating that the extreme weakness in the growth statistics were unlikely to persist into the second quarter.

The turnaround was largely driven by an increase in personal consumption, which grew 2.5% after a meek 1.2% in the first quarter. Purchases of durable goods grew 14% after only going up 3.2% earlier this year.

As is typical with big, unexpected swings in the GDP, much of the change came from the highly volatile category called "change in private inventories," which measures how much stuff businesses accumulate in hopes of selling or producing more in the future. Of the second quarter's GDP number, 1.66 percentage points came from an increase in the change of private inventories, while changes in private inventories took off 1.16 percentage points in the first quarter.

Actual inventory increases were positive in the first quarter — going up $35.2 billion in the first three months of the year and $93.4 billion in the second three months — but the number needs to go up steadily to add to gross domestic product. Taking out change in inventories, the change in the growth rate was less dramatic — decreasing 1% in the first quarter and increasing only 2.3% in the second.