August 28, 2014 10:20 AM, EDT

Economy in US Expands 4.2%, More Than Previously Forecast

Mark Elias/Bloomberg News

The economy in the U.S. expanded more than previously forecast in the second quarter, propelled by the biggest gain in business investment in more than two years, which bodes well for the rest of 2014.

Gross domestic product, the value of all goods and services produced, rose at a 4.2% annualized rate, up from an initial estimate of 4% and following a first-quarter contraction, the Commerce Department reported. The median forecast of 77 economists surveyed by Bloomberg called for a 3.9% gain. Corporate profits climbed by the most in almost four years.

The improvement has carried over into the second half with companies such as General Electric Co. seeing more orders for equipment and a strengthening job market underpinning consumer spending, which accounts for about 70% of the economy. Better prospects for growth signal Federal Reserve officials will continue to wind down monthly asset purchases.

“The economy is clearly doing better,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics. “Business spending is picking up. We’ll see stronger consumer spending in coming months.”

Economists’ estimates in the Bloomberg News survey ranged from 3.5% to 4.3%.

The revisions to GDP showed the pickup in growth last quarter came from bigger gains in corporate spending on structures and equipment and a smaller trade deficit that was partly offset by more tepid inventory building.

Business investment increased at an 8.1% annualized rate, the most since the first three months of 2012.

The report also included revisions to first-quarter personal income. Wages and salaries rose by $131.3 billion, revised down from an initially reported $135.1 billion gain. They climbed by $103.6 billion in the second quarter.

Gross domestic income, which reflects all the money earned by consumers, businesses and government agencies climbed at a 4.7% annualized rate in the second quarter, the most since early 2012.

The GDP estimate is the second of three for the quarter, with the third release scheduled for late September when more information becomes available. The economy shrank at a 2.1% pace from January through March.