U.S. economy expanded by 3.9% in second quarter

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 per cent in the April-June quarter, up from a previous estimate of 3.7 per cent, 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 per cent increase in the first quarter when the economy was battered by a harsh winter.

For comparison purposes, Canada's economy shrank by 0.5 per cent during the second quarter, although it expanded ever so slightly in the last month of June, suggesting it may have turned the corner.

While economists believe growth in the third quarter has slowed to around 2.2 per cent to 2.5 per cent, they expect a modest acceleration in activity for the final three months of this year.

"Overall, the outlook on the U.S. economy for the remainder of the year remains fairly optimistic, supported by continuing job creation, increasing consumer spending, improvements in the housing sector, and solid manufacturing numbers," said Jim Baird, chief investment officer for Plante Moran Financial Advisors.

The revision in second quarter growth was led by a boost in consumer spending, which expanded at a 3.6 per cent rate, up from the previous estimate of a 3.1 per cent 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 per cent pace, even better than the 7.6 percent 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 per cent, which was revised up to 3.7 per cent 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 per cent in the October-December period.

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