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US Economy Grows 4%

After contracting in the first three months of 2014 due to adverse weather conditions, the US economy has bounced back with 4% growth in the second quarter of 2014

Morningstar News Team 30 July, 2014 | 4:00PM

The US economy grew at an annual rate of 4% in the second quarter, according to an initial government estimate. The figure marks a turnaround after gross domestic product registered its first decline in three years in the previous quarter. The rebound in the April to June period reflected gains in consumer spending and business inventory.

Consumer spending rose 2.5%, spurred by purchases of durable goods after growing just 1.2% in the previous quarter, the Bureau of Economic Analysis said. The boost in second quarter GDP outpaced economists' expectations. A survey of economists by Bloomberg news agency had predicted 3% growth in the period. Updated data showed first quarter growth fell a revised 2.1%, less than the 2.9% drop the Bureau of Economic Analysis reported last month.

The steep first quarter decline was attributed to an extremely hard winter that kept consumer spending down along with declines in private inventory investment and state and local government spending. The International Monetary Fund (IMF) last week lowered its 2014 growth forecast for the US economy, pointing to the extremely weak first quarter.

GDP would increase by a "disappointing" 1.7% over the year, the Washington-headquartered IMF said in a report. Markets were closely watching the growth figures as well as a decision expected later Wednesday by the Federal Reserve on its long-running bond buying programme. The figures released Wednesday are an initial estimate based on incomplete data and the government is due to release more complete figures next month.

Nancy Curtin, from Close Brothers Asset Management, said the US economy had a sprung back in its step after the disastrous impact of arctic conditions in the first quarter.

“Since the weather abated, data has been broadly positive. Strong figures for the service sector combined with resurgent consumer confidence and improving manufacturing all hinted at a revival in fortunes, and the second quarter reading has delivered in spades. Nowhere is the ongoing recovery more apparent than in the labour market, where employment numbers have hit pre-crisis levels,” she said.

Economic naysayers had prematurely written off the US market thanks to economic retraction in the first three months of the year, but Curtin says that the most recent GDP figures firmly put to bed fears that the first quarter’s drop was a sign of structural weakness.

“It’s clear that growth in the US has stepped up a level, and we expect to see this continue throughout the three months to September. These improved numbers as already being reflected in a better earnings trajectory and we expect more of this as the year progresses.”

JP Morgan US equities specialist Paul Quinsee, said that the GDP growth backed up conviction in US equities.

Quinsee continues to think that despite the six year rally stocks are a reasonable investment, with the remarkably high level of corporate profits and still attractive valuations compared to bonds as the main supports for keeping a constructive view.

“On profits, our analysts’ near-term expectation for 2014 is virtually unchanged since my last update, at $119 for an 8% year-over-year gain. We’ve edged up our near-term numbers in healthcare and cut a little from our financial forecasts. Longer term, our forecasts haven’t changed much either as we continue to think that the current high level of profitability and cash flow is sustainable for years to come.” 

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