Slow growth aside, jobs data could mean better second half

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The economy grew at a slow 1.4 percent in the first six months of the year, but private sector jobs data for July hold out hope for an improved second half.

GDP for the second quarter grew at 1.7 percent, well above the consensus 0.9 percent. But a downward revision for the first quarter, to 1.1 percent from 1.8 percent, chilled some optimism that the second half will break out to the 2 percent to 3 percent growth level many economists expected.

However, ADP's payroll report showed a jump in private sector payroll growth to 200,000, from the 188,000 reported last month. Economists follow ADP as a precursor to the government jobs report, and it may influence some economists' forecasts, though it has been either higher or lower than the actual jobs report by an average 40,000 a month this year.

"The economic growth since last year has been very disappointing, largely because of the fiscal drags from tax increases and spending cuts, sequester, but it hasn't translated into weaker jobs growth," said Mark Zandi, chief economist with Moody's Analytics. "Businesses appear to be looking through the fiscal headwinds, which is very encouraging and suggests that as those headwinds fade later this year, GDP growth and jobs growth will accelerate."

Zandi said he is convinced that the second half will rebound to a growth rate of 2.6 percent because of the consistent job growth in the first half, which averaged about 200,000 a month, according to government jobs data. He expects to see 185,000 nonfarm payrolls in July when the government data is released Friday.

Markets reacted mixed, with the dollar moving higher and bonds selling off. Stock futures retreated as traders reacted to a sharp jump in interest rates. The drama was in the bond market, where the 10-year yield jumped to 2.7 percent after the ADP jobs number, before slipping back to 2.66 percent when GDP was released 15 minutes later.

(Read more: US expands at brisk pace in Q2, defying gloom)

When stocks opened, the market moved higher and bond yields remained elevated, with the 10-year flirting with that 2.7 percent level. In late morning trading the Dow moved sharply higher, to a new record.

"The bond market is responding as it should to tightening," said Peter Boockvar, chief market analyst at the Lindsay Group. "The stock market is still deciding between on the one hand, if the job market is better, earnings will be better, and on the other hand, it's tough to ignore this move higher in interest rates."

(Read more: Jumping jobs! Private sector makes big hiring move)

This comes against the backdrop of the Federal Reserve Open Market Committee's meeting, which ends with a statement later Wednesday. While the Fed is not expected to use its 2 p.m. ET statement to deliver any new messages, traders are watching to see if it will say anything about paring back its $85 billion bond purchases. Tapering of the program is widely expected to begin in September if economic data are strong enough.

"This is a conundrum for the Fed: Is the jobs gain going to lead to second half improvement?" Boockvar said. But the risk is a slow-moving economy crimping further jobs gains, and Friday's July jobs report will be key. "If we're getting 200,000 jobs three months in a row, the Fed may lean more toward that and put their chips on a second half recovery," he added.

The GDP data come with a major revision in the way the government calculates GDP. Research and development costs, for instance, will now be counted as investment. The data also take into account a new way to calculate intellectual property so that Hollywood now counts as investments spending on movies and some other programming.

One result was a major revision to 2012 GDP. The first quarter showed a sharp gain, and the fourth quarter showed hardly any growth, but overall growth for the year moved up to 2.8 percent from 2.2 percent.

For second-quarter 2013, the government said, the acceleration came from increases in nonresidential fixed investments, higher exports and a smaller cut in federal spending. There was also in increase in state and local government spending. These things partly offset a rise in imports and a drop in private inventory investment and personal consumption expenditures.

"The gaps in the data are related to the data," Zandi said. "The revisions will close the gap, but more positively I do think businesses are now looking at the glass as half-full as opposed to half-empty and are willing to look through current weakness in growth and sales and continue to hire and that is encouraging."

Zandi said the key is the housing market and whether it can continue to rebound. His expectation for improved growth comes on the back of a pickup in housing and construction.

"I think the Fed's got it right. They can manage this," he said. "The threat is they can't manage this and bond yields rise too far, too fast."

"It's a battle right now between economists and bond traders. ... And I'm sticking with the economists," he said.

The GDP benchmark revisions are the first in five years. The changes go back to 1929, and the government said that for the 1929 to 2012 period, average annual growth rate of real GDP was 3.3 percent—0.1 percent higher than previously estimated.

For the more recent period of 2002 to 2012, the growth rate was 1.8 percent—0.2 percentage points higher. In that period, the rate of change in prices paid by Americans was 2.3 percent, 0.1 percent less than prior estimates.

*This story has been updated to show a 1.4 percent year over year change in first half GDP.