Economy grew at sluggish pace, expected to improve

WASHINGTON -- The U.S. economy grew from April through June at an annual rate of 1.7 percent -- a sluggish pace but stronger than in the previous quarter. Businesses spent more, and the federal government cut less, offsetting weaker spending by consumers.

The government on Wednesday sharply revised down its estimate of growth in the January-to-March quarter to a 1.1 percent annual rate from a previously estimated 1.8 percent rate.

Though growth remains weak, the pickup last quarter supports forecasts that the economy will accelerate in the rest of the year. Economists think businesses will step up investment, job growth will fuel more consumer spending and the drag from government cuts will fade. If so, the Federal Reserve could scale back its stimulus later this year.

The April-to-June growth figure indicates that "the recovery is gaining momentum," Paul Ashworth, an economist at Capital Economics, said in a note to clients.

During the April-to-June quarter, businesses increased their spending 4.6 percent after cutting by the same amount in the January-to-March period. And spending on home construction grew 13.4 percent, in line with the previous quarter.

At the same time, the federal government cut spending only 1.5 percent after slashing it 8.4 percent in the first quarter. And state and local governments spent more for the first time in a year.

Still, government cutbacks have weighed heavily on the economy the past 12 months. Over the past four quarters, the economy has grown at just a 1.4 percent annual rate. But if you exclude federal, state and local governments, the private sector has expanded at a much stronger 2.3 percent rate.

The "ongoing fiscal drag is masking private sector health," said Joseph LaVorgna, an economist at Deutsche Bank, said.

The weaker growth in consumer spending last quarter was significant because consumers account for about 70 percent of the economy. And a surge in imports reduced growth by the most in three years.

Yet economists say steady job growth should provide enough money for Americans to spend more and help the economy expand at an annual rate of around 2.5 percent in the third and fourth quarters.

Some signs in the report suggest that companies expect demand to pick up. Businesses added to their stockpiles last quarter -- typically a sign that they foresee higher sales.

On Wednesday, the government also released comprehensive revisions that updated the nation's gross domestic product, or GDP, over the past several decades. Those figures showed that the Great Recession wasn't quite as steep as initially estimated and that the recovery has been stronger than earlier thought.

The revisions showed that the economy grew 2.8 percent in 2012, up from an earlier estimate of 2.2 percent. Growth in last year's first quarter was revised much higher. And growth in the fourth quarter of 2012 was reduced to an annual rate of just 0.1 percent.

GDP is the broadest measure of the nation's output of goods and services. It includes everything from manicures to industrial machinery. But the government's comprehensive revisions included changes in how GDP is defined.

Research and development spending is now counted as investment, rather than an expense. So is spending on the development of entertainment products such as movies, music, books and TV shows. Those changes increased the size of the economy by about $470 billion, or about 3 percent, as of the end of 2012.

Pension benefit promises are now counted as income. That's a shift from the previous approach, which counted only actual cash payments by companies and government agencies into pension plans. This change boosted the savings rate by 1.5 percentage points in 2011 and 2012 to about 5.6 percent. In the second quarter, Americans saved 4.5 percent of their after-tax income, up from 4 percent in the first quarter.

Despite the still-sluggish economy, recent data have been encouraging and suggest that growth will strengthen.

Home construction, sales and prices have been growing since early last year. Americans bought newly built homes in June at the fastest pace in five years. That's helped raise builder confidence to a seven-year high, which should lead to increases in construction and more jobs.

Overall hiring has accelerated this year. Employers added an average of 202,000 jobs a month from January through June, up from 180,000 in the previous six months.

A separate report Wednesday pointed to solid job gains in July. Payroll provider ADP estimated that businesses added 200,000 jobs in July, the most since December.

And auto sales topped 7.8 million in the first six months of 2013, the best first-half total since 2007. Analysts expect sales to remain solid the rest of the year.

Unemployment is still high at 7.6 percent, limiting consumer spending. And budget fights in Washington could lead to a government shutdown this fall, potentially disrupting the economy.

Federal Reserve officials have forecast better growth in the second half of the year. And Chairman Ben Bernanke has said the Fed could scale back its bond purchases later this year if the economy strengthens. But Fed officials typically put more weight on employment and inflation data than on GDP figures.

The Fed ends a two-day policy meeting Wednesday, after which it could clarify its interest-rate policies in a statement.

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