Revised Q2 GDP: Here’s Proof of a Stronger Economy

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Consumer spending, which accounts for approximately 70 percent of United States gross domestic product, is now more important than ever. Because government and business spending have remained weak, the economy is depending even more on household spending to fuel growth.

“Nothing looms larger than the health of the consumer in a second-half [economic] pickup,” economists at Citigroup wrote in a research note earlier this month. However, the still stubbornly high unemployment rate, stagnant wages, and higher payroll taxes have kept many consumers cautious, keeping purchases to immediate needs.

In fact, consumer caution was cited as one of the main reasons as to why the U.S. economy grew at anemic 1.7 percent in the first quarter. After rising at a 2.3 percent rate in the first quarter, spending slowed to a 1.8 percent pace.

However, the Department of Commerce’s revised estimate of GDP growth showed that economic growth actually accelerated at a far stronger pace than previously calculated. Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.5 percent in the second quarter of 2013. This compares to the 1.1 percent rate of growth recorded in the first quarter and a 0.1 percent growth rate in the fourth quarter of 2012.

This upward revision is one sign that the economic recovery is turning a corner, but with unemployment remaining stubbornly high at 7.4 percent, a full recovery from the recession is likely years away. Furthermore, at 2.5 percent, GDP growth is well below the 3.3 percent the U.S. economy has averaged since 1929.

Despite a number of disappointing earnings reports from retailers like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT), whose results showed consumers were curbing their spending, an increase in consumer spending contributed to the higher GDP figure. Stagnant wages and higher payroll taxes have affected spending for lower-income earners, but rising home values have given homeowners more equity. This, combined with the modest gains made by the labor market, put them in a better position to increase their outlays.

You’re seeing a bit of a split economy where that lower-income consumer has been under a lot of pressure but the higher end is doing OK,” Telsey Advisory Group senior research director Joe Feldman told CNBC.

Alongside consumer spending, rising exports and real estate spending helped boost the second-quarter numbers even as lower government spending acted as a drag. But the primary reason for the large upward revision was a better trade balance, according Paul Ashworth, the chief U.S. economist at Capital Economics. As he told CNN, the U.S. exported more and imported less than the Commerce Department previously estimated.

Economists are expecting March’s across-the-board spending cuts to have worked their way through the system by the end of the fiscal year on September 30. The weight of those austerity measures were evident in the second quarter, with Thursday’s GDP data showing that the economic drag resulting from the federal government’s spending cuts was greater than initially estimated. However, as the effects of the budget cuts begin to fade, economists believe economic growth will increase.

“The focus is now on the second half of the year,” Royal Bank of Scotland economists told The Wall Street Journal before the first estimate of GDP growth was released in July. ”Most expect the pace of activity to pick up over the final six months of 2013, though the magnitude of the acceleration is highly debated.”

Combined with an expected acceleration in job creation for August, the revised second-quarter GDP could give the Federal Reserve cause to announce a scaling back of its monthly $85 billion stimulus program at the central bank’s September 17-18 policy meeting. Chairman Ben Bernanke already said that the central bank plans to begin reducing the stimulus later this year if the economy meets the Fed’s employment and inflation targets.

The central bank’s monthly bond purchases have reduced borrowing costs, providing the impetus for the housing market recovery. In fact, investments in housing or real estate spending accounted for almost one-fifth of second-quarter economic growth.

The Department of Labor’s August Employment Situation Report will also provide economists with important data on the health of the U.S. economy.

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