What's going on?
Phew! According to data out on Friday, the US economy picked up its pace in the second quarter (tweet this), making amends for a lackluster start to the year.
What does this mean?
The US economy grew at a 2.6% annual rate in the second quarter, a rebound following 1.2% growth in the previous quarter (although many economists believe that errors in the calculations made the first quarter appear worse and the second quarter appear better than reality). The result is that the US economy appears to have grown about 2% in the first half of the year – about the same rate it’s grown over the past eight years. Historically speaking, that’s a slow but steady pace of growth.
Why should I care?
The bigger picture: Businesses are spending more on investing for the future.
A measure of business spending on “fixed investment” (think: installing new firm-wide software) rose over 5%, one of the highest rates of the past few years. This suggests that after years of relatively little spending, businesses are investing in new factories, equipment, and other big things. Such investment should boost businesses’ productivity (i.e. they will make more products with less human effort), which is a key component of improving economic growth.
For markets: Stocks have bet on a pickup in economic growth that has yet to take flight.
US stocks jumped sharply following the presidential election partly due to investors’ beliefs that new political policies would boost economic growth (e.g. less regulation on businesses). So far, the US economy is growing at its same old rate, but there are some reasons to be optimistic that it will improve. Business investment, as described above, is one reason. Another is that the US dollar has weakened almost 10% versus other major currencies this year, which makes it easier for US companies to sell their products abroad. Stock prices, which have moved 20% higher since the election, appear to, at least somewhat, be factoring in this more optimistic scenario.