from the St Louis Fed

— this post authored by Kevin L. Kliesen

Following a rather tepid showing in the first quarter of 2017, the U.S. economy expanded at a modestly faster rate of growth in the second quarter. Although data indicated a springtime lull in housing construction and slower truck and auto sales, these slowdowns are likely temporary in view of other developments:

First, the manufacturing sector is strengthening – new and unfilled orders for new manufactured capital goods are increasing from year-earlier levels.

Second, job growth and real income growth remain robust, and the unemployment rate fell to its lowest level in a little more than a decade in the second quarter.

Third, household net worth rose sharply over the first half of the year, powered by rising house prices and sharp increases in stock prices.

Finally, inflation pressures eased in the second quarter, which financial markets assume will slow the pace of future Fed rate hikes. Despite the Fed’s three tightening moves since late 2016, long-term nominal interest rates fell slightly in the second quarter and measures of financial market stress remain low.

Looking Past the Headlines

Swings in private inventory investment are volatile and can sometimes mask the underlying pace of growth in sales of goods and services. For example, the change in private inventories (goods produced but not sold) added 1 percentage point to real gross domestic product (GDP) growth in the fourth quarter of 2016, but then subtracted 1.5 percentage points from real GDP growth in the first quarter of 2017.

Accordingly, to gauge the underlying strength of the economy, economists sometimes pay more attention to real final sales (GDP less inventory investment). When viewed from this standpoint, the economy exhibited an upswing in growth over the first half of 2017, as real final sales advanced at a 2.6 percent annual rate in the first and second quarters. By contrast, growth of real final sales increased at only a 0.7 percent rate in the fourth quarter of 2016.