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Second Estimate of GDP for the Second Quarter of 2014

Today’s revision affirms that economic growth in the second quarter was strong, consistent with the recent string of solid job growth and improvements in other economic indicators.

Today’s revision affirms that economic growth in the second quarter was strong, consistent with the recent string of solid job growth and improvements in other economic indicators. But there's more work that needs to be done to build on this momentum. That is why the President continues to act on his own to facilitate investment in American manufacturing, energy, and infrastructure, as well as take steps to improve the financial security of working families.


1. Real gross domestic product (GDP) increased 4.2 percent at an annual rate in the second quarter of 2014, according to the second estimate from the Bureau of Economic Analysis. The strong second-quarter growth represents a rebound from a first-quarter decline in GDP that largely reflected transitory factors like unusually severe winter weather and a sharp slowdown in inventory investment. Growth in consumer spending and business investment picked up in the second quarter, and residential investment increased following two straight quarters of decline. Additionally, state and local government spending grew at the fastest quarterly rate in five years. However, net exports subtracted from overall GDP growth, as imports grew faster than exports. Real gross domestic income (GDI), an alternative measure of the overall size of the economy, was up 4.7 percent in Q2.

2. Second-quarter real GDP growth was revised up 0.2 percentage point from the advance estimate released in July. The contribution of business investment to growth was revised up 0.4 percentage point, as investment in both structures and equipment grew faster than previously reported. The net export contribution to growth was also revised up, by 0.2 percentage point. These upward revisions were partially offset by a 0.3 percentage point downward revision to the contribution from inventory investment, and small revisions to other components. 

3. Over the last four quarters, real GDP has risen 2.5 percent, faster than the 2.0 percent annualized pace observed over the preceding eight-quarter period. Looking at four- and eight-quarter changes to smooth some of the quarter-to-quarter volatility, it is clear that many components of GDP are showing improvement. The growth rates of consumer spending, business investment and exports have all picked up, and the pace of declines in the Federal sector have moderated a bit. In addition, the State and local government sector has turned positive, after several years of steady cutbacks. One area that has slowed over the last four quarters is residential investment, which is discussed in greater detail in the next point.

4. Real residential investment rose 7.2 percent at an annual rate in the second quarter, following two straight quarters of decline. Previously, residential investment had expanded in 10 straight quarters from 2011:Q2 through 2013:Q3. The weakness in residential investment in 2013:Q4-2014:Q1 was in large part due to a drop in brokers’ commissions and other ownership transfer costs, which are included in residential investment but are generally reflective of home sales rather than construction activity. In the second quarter, the “other” components of residential investment (brokers’ commissions, home improvements, dormitories, and manufactured homes) returned to growth, and single- and multi-family construction continued to grow, leading to a gain in overall residential investment. Nevertheless, the level of residential construction activity represented 3.2 percent of GDP in the second quarter, still well below its average of 4.6 percent from 1960 to 2000.

5. Real private domestic final purchases (PDFP) -- the sum of consumption and fixed investment -- rose 3.5 percent at an annual rate in the second quarter. Real PDFP growth is generally a more stable and forward-looking indicator than real GDP because it excludes highly volatile components like inventory investment and net exports. For instance, in the first quarter, consumption and fixed investment posted positive growth, while the decline in overall GDP mostly reflected drops in the inventory investment and net export components. In the second quarter, consumption and fixed investment grew strongly, but by somewhat less than overall GDP, which received a boost from inventory investment that was only partially offset by falling net exports.

As the Administration stresses every quarter, GDP figures can be volatile and are subject to substantial revision. Therefore, it is important not to read too much into any one single report and it is informative to consider each report in the context of other data that are becoming available.

Jason Furman is Chairman of the Council of Economic Advisers.