US economic growth accelerated in the second quarter as solid consumer spending offset the drag from weak business spending on equipment, suggesting a steady momentum that could bring the Federal Reserve closer to hiking interest rates this year.

Gross domestic product expanded at a 2.3 per cent annual rate, the Commerce Department said on Thursday. First-quarter GDP, previously reported to have shrunk at a 0.2 per cent pace, was revised up to show it rising at a 0.6 per cent rate.

The revision to first-quarter growth reflected steps taken by the government to refine the seasonal adjustment for some components of GDP, which economists said left residual seasonality in the data, as well as new source data.

The Fed on Wednesday described the economy as expanding “moderately” while upgrading its view of the labour market and saying housing had shown “additional” improvement. The Fed’s assessment left the door open for a possible hike in interest rates in September, which would be the first rise since 2006.

A separate report showed first-time applications for state unemployment benefits increased 12,000 last week to a seasonally adjusted 267,000. However, claims remained not too far from their cycle lows.

The dollar extended gains against a basket of currencies, while prices for US Treasury debt fell slightly.

Though second-quarter GDP growth was a bit below economists’ expectations for a 2.6 per cent rate, the growth composition pointed to firming domestic fundamentals.

A measure of private domestic demand, which excludes trade, inventories and government expenditures, increased at a 2.5 per cent rate after rising at a 2 per cent pace at the start of the year.

Growth in the second quarter was boosted by consumer spending as households used some of the windfall from cheaper gasoline in late 2014 and early this year to go shopping. The strengthening labor market also encouraged consumers to loosen their purse strings.

Consumer spending, which accounts for more than two-thirds of US economic activity, grew at a 2.9 per cent rate from a downwardly revised 1.8 per cent pace in the first quarter. Consumer spending was previously reported to have increased at a 2.1 per cent rate at the start of the year.

The saving rate fell to 4.8 percent from 5.2 per cent.

ENERGY DRAG PERSISTS

Housing also supported the economy in the second quarter, as did exports, and state and local government spending.

However, the energy sector continued to weigh on growth as it struggles with the lingering effects of deep spending cuts by oil-field companies like Schlumberger and Halliburton in the aftermath of a more than 60 per cent plunge in crude oil prices last year.

Business spending on structures fell at a 1.6 per cent rate after stumbling 7.4 per cent at the start of the year. Investment on equipment fell at a 4.1 per cent rate.

Spending on mining exploration, wells and shafts plunged at a 68.2 per cent rate, the largest decline since the second quarter of 1986. This category dropped at a 44.5 per cent pace in the first quarter.

But there are signs that the energy spending rout might be nearing an end. Data last Friday showed US energy firms added 21 oil rigs last week, marking the third increase over the past 33 weeks.

Schlumberger said last week it believed the North American rig count may be bottoming and that a slow rise in both land drilling and completion activity could occur in the second half of the year.

Exports rebounded in the second quarter, despite a strong dollar, while imports rose moderately. That left a smaller trade deficit that added 0.13 per centage point to GDP growth.

Inventory investment slowed after the first quarter’s brisk pace. Businesses accumulated $110.0 billion worth of merchandise, down from $112.8 billion in the first quarter, good news for the remainder of the year.

With oil prices rising during the second quarter and consumer spending picking up, inflation accelerated sharply.

The personal consumption expenditures price index rebounded at a 2.2 per cent rate, the fastest since the first quarter of 2012, after falling at a 1.9 per cent rate at the start of the year. Excluding food and energy, prices increased at a 1.8 per cent pace.

Reuters