Skip to main content
ABC News
The Economy Bounced Back From Its Winter Slump

U.S. gross domestic product, the broadest measure of goods and services produced in the economy, grew at a 4 percent rate between April and June, the Bureau of Economic Analysis said Wednesday. That represents a sharp reversal from the first quarter of the year, when the economy shrank. Moreover, that dismal first quarter wasn’t quite as bad as previously believed: GDP shrank at a 2.1 percent rate rather than the 2.9 percent reported last month. All in all, the report should ease concerns — never widely held by economists — the economy was headed for a major slump. But it will take at least a couple of more quarters of strong growth before this starts to look like a genuine acceleration, not just a one-off rebound.

Here are a few more observations from Wednesday’s report:

Yes, this was good news: GDP reports are notoriously complex, and there’s always room for caveats and alternative interpretations. But make no mistake: This was a good report, especially in context. A 4 percent annual growth rate isn’t a boom, but it’s significantly better than the 3 percent economists had been expecting, and it more than offsets the first quarter’s contraction. The growth was broad-based, with consumers, businesses and even the government contributing to the rebound. Wednesday’s report provides strong evidence the first-quarter contraction was a one-off event that was probably due in part to the historically bad winter in much of the country: Consumer spending, homebuilding and exports all struggled in the first quarter and rebounded in the second. The revisions, too, were cause for optimism: The first quarter wasn’t quite as bad as it once looked, and the end of 2013 was stronger, suggesting the economy carried more momentum into the start of 2014 and lost less of it when winter weather hit. All of that gives hope for continued growth.

But watch out for revisions: When the government released its first estimate of first-quarter GDP in April, it said the economy grew ever so slightly, at a 0.1 percent rate. Now the government thinks the economy actually shrank significantly. And though that swing was particularly drastic, big revisions are far from unusual: Initial GDP estimates are based on incomplete data and are notoriously unreliable. There’s particularly good reason to be cautious this time around: Health care spending has been extremely hard to estimate recently because of the changes brought on by the Affordable Care Act. Health spending wasn’t a big factor in Wednesday’s report, but significant revisions are possible.

Mixed signals for the future: Wednesday’s report is backward-looking, covering economic growth from April through June. But it contained some hints about the future, both positive and negative. On the positive side, the government revised down its estimates for growth in 2011 and 2012, and revised up its estimate for 2013; that had the effect of making the overall trajectory of the recovery look more positive. The government also revised up its estimate of how much Americans saved over the past three years, which means consumers might be in a better position to spend going forward. But on the negative side of the ledger, a big piece of the second quarter’s economic growth (more than 40 percent) came from inventories; that is, from companies restocking their shelves and storerooms rather than selling products. That kind of growth is unlikely to continue next quarter.

Prices rise faster: Consumer prices rose at a 2.3 percent annual rate in the second quarter, up from 1.4 percent in the first. (The Bureau of Economic Analysis calculates prices slightly differently than the Bureau of Labor Statistics, which publishes the better-known consumer price index.) The Federal Reserve, which prefers the BEA methodology, targets a long-run inflation rate of 2 percent. The Fed is unlikely to become too concerned by a one-quarter uptick, but Wednesday’s figure will nonetheless lead critics to argue that the Fed needs to raise interest rates soon to keep prices in check. Those critics have been proven wrong repeatedly in recent years, but with the unemployment rate falling and job growth holding strong, their concerns are gaining more widespread support.

Ben Casselman was a senior editor and the chief economics writer for FiveThirtyEight.