By Greg Robb, MarketWatch
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The numbers: Consumers and government spending powered the economy to a 4.1% rate of gross domestic product growth in the second quarter, the fastest pace in almost four years.
Economists surveyed by MarketWatch had forecast a 4.2% increase in GDP, the official scorecard for the U.S. economy.
Growth was revised up in the first quarter to 2.2% from 2%.
What happened: Consumer spending accelerated to a 4% annual pace of growth after a sharp pullback in the first quarter. Government spending also accelerated at both the federal and state levels.
Business fixed investment increased 5.4% in the second quarter, down from a 8% gain in the first three months of the year.
Residential investment declined for the second straight quarter but at a slower pace than the first quarter.
The trade gap narrowed, boosting GDP. But this was offset by a downturn in inventory investment. Still, perhaps a truer reading of economic power, real final sales for domestic purchasers, which excludes trade and inventories, rose a strong 3.9% in the second quarter.
Inflation moderated a bit. The personal consumption expenditure price index rose at a 1.8% annual rate in the second quarter, down from a 2.5% rate in the first quarter. The core rate rose at a 2% rate, down from 2.2% in the first quarter.
Big picture: Activity boomed in the second quarter and the growth does not seem to be due to one-off factors, as some economists had feared.
Over the past year, the economy has expanded at a 2.8% annual pace, up from a 2.6% annual rate in the first quarter. Economists say this is strong enough to keep putting downward pressure on the unemployment rate.
Fed Chairman Jerome Powell has said that strong growth is one reason the central bank should keep raising interest rates. With inflation moderate, the Fed is expected to stay on the pace of a quarter-percentage point rate hike every three months.
Many analysts think growth should stay strong, helped by stimulative fiscal policies, such as tax cuts. There is concern reported in various business surveys that trade disputes could slow activity, but so far there is little evidence of any disruption in the economic data.
What are economists saying?: “This is the high watermark for the year as it will be difficult to surpass. There will be some deceleration, but to 3% growth from 4%,” said Ryan Sweet, director of real-time economics at Moody’s Analytics. He said the strength of consumer spending was a surprise and was fueled in part by the Trump tax cut. But it wasn’t all taxes. The tight labor market is helping consumers as well, Sweet added.
Market reaction: U.S. stocks /zigman2/quotes/210598065/realtime DJIA +0.24% saw little movement on Friday, as investors juggled another batch of corporate results. The dollar /zigman2/quotes/210598269/delayed DXY -0.30% held its modest gain after the data hit.