New Method Finds U.S. Economy Grows Faster Than Expected, 2Q GDP 1.7%?

U.S. economic growth unexpectedly accelerated in the second quarter, economic news that could bring the Federal Reserve a step closer to cutting back its monetary stimulus. The news comes on the heels of a report that found that 4 in 5 Americans have been experiencing some level of poverty, and white populations suffering more than ever.

Gross domestic product, or GDP grew at a 1.7 percent annual rate, the Commerce Department said on Wednesday, stepping up from the first-quarter’s downwardly revised 1.1 percent expansion pace.

Economists polled by Reuters had forecast the economy growing at a slow 1.0 percent pace after a previously reported 1.8 percent advance in the first three months of the year.

A rebound in business spending, export growth and a sharp moderation in the pace of decline in government outlays boosted economic growth in the April-June period, which offset a slowdown in consumer spending and a steady rate of inventory accumulation.

However, this report marks a third straight quarter of GDP growth below 2 percent, a pace that historically pales in comparison for U.S. economic growth, and typically would be too soft to bring down unemployment. But with so many people leaving the workforce unemployment has actually fallen before a quick bump back up.

The Federal Reserve have been wrestling with a decision on the future of their $85 billion per month bond-buying program, will probably give acknowledgement to the downward revision to first-quarter growth, but will tackle the implications of the pick-up in output last quarter, when they wind-up a two-day meeting later on Wednesday.

Fed Chairman Ben Bernanke said last month that the central bank was likely to start curtailing the bond purchases later this year and would probably bring them to a complete halt by the middle of 2014, if the economy progressed as expected. It never did, and any sign that the Fed was thinking of pulling back was met with intense sell-offs on Wall Street.

But is the economy really growing at a faster than expected rate, or is the government’s decision to change how GDP is calculated the real reason for the change in the pace of growth? Comprehensive revisions to the data cast the economy in a better light than previously would have been measured.

The government has implemented some changes in how it calculates GDP. For example, research and development spending will now be treated as investment, and defined benefit pension plans will be measured on an accrual basis, rather than as cash.

Economic growth was relatively stronger between 2009 and 2012 than previously reported with these new measurements, but is no better than previously reported. In fact, the economy grew 2.8 percent last year, 0.6 percentage points faster than the government had previously estimated in the old – and more accurate – system of measurement.

The revisions also yielded a higher rate of savings, which is meant to sound like a good omen for consumer spending in the future. In reality, confidence is down and it will be interesting to see if this has any psychological effect.

As Washington supposedly tries to shrink the government’s budget deficit, higher taxes and constrained consumer spending in the second quarter have been keeping the economy on an anemic growth pace.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, slowed to a 1.8 percent growth pace after rising at a 2.3 percent rate in the first quarter.

With domestic demand down, businesses kept their inventories from bulging. Inventory accumulation added 0.41 percentage point, less than half the contribution from the prior quarter.

Other details of the report showed exports have rebounded, showing the largest percentage gain since the third quarter of 2011, even as demand weakened in Europe and China. But the increase was not enough to offset a rise in imports, leaving a trade deficit that weighed on growth.

The housing sector news, which was construed as positive, saw a sector with double-digit growth for spending on residential construction. Housing, which triggered the 2007-09 recession, is growing on the backs of investors buying up former vacant property as a result of government incentive designed to prop the sector up, helping to keep the economic recovery anchored. Unfortunately, a record number of younger Americans are living with their family, and have no savings or income to purchase homes at a rate that is necessary for a sustained growth over time.

Business spending on equipment and software reversed the prior quarter’s decline, lifted by a turnaround in investment in nonresidential structures and gains in outlays on equipment and intellectual products.

While government spending contracted for a third straight quarter, the pace of the decline slowed sharply as state and local government spending rebounded. Defense spending fell marginally after declining sharply in the past two quarters.

The Bureau of Labor Statistics will release their numbers on Friday, which have not had a history of mirroring the ADP report, but we will keep our fingers crossed.

UPDATE: The blue-chip average logged a fresh record high as traders bid up stocks on the back of strong readings on the U.S. economy. The Dow is up 105 points, or 0.68%, while the broader S&P 500 is up 0.59%.

The Institute for Supply Management-Chicago’s gauge of manufacturing in the Midwest rose to 52.3 in July from 51.6 in June, shy of estimates of 54. Readings above 50 indicate expansion, while those below point to contraction. The latest manufacturing gauge shows more bad news for an already disappearing middle-class.