GDP Increased at 1.7 Percent Annual Rate, Higher Than Expectations

July 31, 2013 — -- The U.S. economy grew at an annual rate of 1.7 percent in the second quarter of this year, better than most economists had expected but still showing tepid economic growth.

The three major stock indices opened higher today. The Dow Jones Industrial Average was up about 0.36 percent to 15,577.

Before the Commerce Department's report of the first look at the country's output of goods and services, many economists forecasted growth of 1 percent from April to June. A second quarter estimate based on more complete data will be released Aug. 29.

This is the third consecutive quarter of GDP growth below 2 percent, which is usually too slow to bring down unemployment. There are expectations that the economy will pick up steam in the second half of the year.

In addition to reporting about the April-to-June period, the Commerce Department's Bureau of Economic Analysis revised growth in the first quarter down to 1.1 percent from 1.8 percent.

Chief economist Scott Brown of Raymond James said the surprise in the headline 1.7 percent figure was the contribution from inventories, which accelerated and added 0.4 percentage points to GDP growth.

Consumer spending, at a 1.8 percent annual rate, was in line with expectations while business fixed investment was slightly stronger than anticipated.

As expected, there was a cut in government spending -- 1.5 percent annual rate -- though it was a smaller decrease than in the first quarter GDP report when it fell 8.4 percent. Government subtracted 0.4 percentage points from GDP growth in the first half of the year.

Following today's GDP report, the Federal Reserve will release a statement at the end of its two-day meeting, but the central bank is not expected to announce any changes to its monetary policy. On June 19, Federal Reserve chairman Ben Bernanke had discussed plans to moderate its $85 billion a month bond purchases later this year, thereby contributing to higher interest rates.

Interest rates on loans, stock and bond markets react to the Federal Reserve's policies.

Guy LeBas, chief fixed income strategist with Janney Capital Markets, said the Federal Reserve is now simply monitoring whether the economy is not deteriorating to continue plans to taper its bond purchases.

"The question which we've received more than any other is how a stronger GDP release and/or the revisions will alter FOMC thinking. Our short answer is that it won't," LeBas wrote in a note about today's GDP report.

Part of the Federal Reserve's argument in favor of maintaining its simulative bond purchases is the country's stale jobs market.

Also today, payroll provider ADP reported that the private sector created 200,000 jobs in July, better than expected. The ADP report comes two days before the government releases its report on jobs.

The Labor Department last month reported that 195,000 jobs were added in June, with an unemployment rate of 7.6 percent.