WASHINGTON (Reuters) – The U.S. economy expanded a bit faster than previously estimated in the second quarter, recording its quickest rate of growth in more than two years, but the momentum likely slowed in the third quarter due to the impact of Hurricanes Harvey and Irma.
Gross domestic product increased at a 3.1 percent annual rate in the April-June period, the Commerce Department said in its third estimate on Thursday. The upward revision from the 3.0 percent rate of growth reported last month reflected a rise in inventory investment.
“The destruction caused by Hurricanes Harvey and Irma and the resulting disruption … are expected to be a drag on third-quarter growth,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan. “Nonetheless, the economy remains on track.”
Economic growth last quarter was the quickest since the first quarter of 2015 and followed a 1.2 percent pace in the January-March period. Economists estimate that Harvey and Irma, which struck Texas and Florida, could cut as much as six-tenths of a percentage point from GDP growth in the third quarter.
Harvey was blamed for much of the decline in retail sales, industrial production, homebuilding and home sales in August. Further weakness is anticipated in September because of Irma.
Rebuilding efforts are, however, expected to boost GDP growth in the fourth quarter and in early 2018. Signs of increasing inventory investment by businesses could soften the storms’ punch to the economy.
In a separate report on Thursday, the Commerce Department said wholesale inventories jumped 1.0 percent in August after rising 0.6 percent in July. Inventories at retailers shot up 0.7 percent after being unchanged in July. The department also said the goods trade deficit fell 1.4 percent to $62.9 billion in August.
That leaves an upside risk to growth estimates for the July-September quarter, which are below 2.5 percent.
“The data available so far suggest that the firming in real inventory accumulation between second quarter and third quarter could be significant and could add over a full percentage point to growth in the third quarter,” said Daniel Silver, an economist at JPMorgan in New York.
Harvey and Irma continue to impact the labor market and are expected to cut into job growth this month. In a third report, the Labor Department said initial claims for state unemployment benefits increased 12,000 to a seasonally adjusted 272,000 for the week ended Sept. 23.
Still, the labor market remains strong. Claims have now been below the 300,000 threshold, which is associated with a robust labor market, for 134 straight weeks. That is the longest such stretch since 1970, when the labor market was smaller.
Economists had expected that the second-quarter GDP growth rate would be unrevised at 3.0 percent.
Prices for longer-dated U.S. Treasuries were trading lower and the dollar .DXY slipped against a basket of currencies. Stocks on Wall Street were mixed.
ROBUST CONSUMER SPENDING
With GDP accelerating in the second quarter, the economy grew 2.1 percent in the first half of 2017. Even so, economists believe growth this year will fall short of President Donald Trump’s ambitious 3.0 percent target.
Trump on Wednesday proposed the biggest U.S. tax overhaul in three decades, including lowering the corporate income tax rate to 20 percent and implementing a new 25 percent tax rate for pass-through businesses such as partnerships to boost the economy.
But the plan gave few details on how the tax cuts, which could cost about $1.5 trillion over a decade, would be paid for without increasing the budget deficit. That sets up what is likely to be a bruising battle in the U.S. Congress.
“The plan’s price tag would also result in an increase in the national debt, which could make it difficult to pass as is. Odds are the proposal will be scaled back,” said Ryan Sweet, senior economist at Moody’s Analytics in Westchester, Pennsylvania.
Growth in consumer spending, which makes up more than two-thirds of the U.S. economy, was unrevised at a 3.3 percent rate in the second quarter as an increase in spending on services was offset by a downward revision to durable goods outlays.
Amid robust consumer spending, businesses accumulated a bit more inventory than previously reported to meet the strong demand. Inventory investment added just over one-tenth of a percentage point to GDP growth in the second quarter. It was previously reported to have been neutral.
Growth in business spending on equipment was unchanged at a rate of 8.8 percent, the fastest pace in nearly two years.
Investment on nonresidential structures was revised to show it increasing at a 7.0 percent pace, up from the previously reported 6.2 percent rate. There were minor revisions to government spending, exports and imports.
Investment in homebuilding was weaker than previously reported, with outlays falling at a 7.3 percent rate rather than at a 6.5 percent pace.
Reporting by Lucia Mutikani; Editing by Paul Simao