U.S. GDP came in stronger than expected for the second quarter. But economists still want to see the recovery build before they sound the all-clear siren.

Headline GDP growth came in at an annualized 2.4%. The market was expecting something closer to 1.5%. “Capital spending picked up appreciably, a key missing piece of the improving outlook puzzle,” reports BMO Nesbitt Burns. “Spending by U.S. buyers was much stronger than GDP. Spending spilled into imports vigorously, but the lower dollar will help U.S. makers rebuild market share.”

Nesbitt also notes that inventories collapsed in Q2 and now have to be rebuilt, and defense spending was a temporary special factor boosting GDP. TD Bank says that consumer spending, government spending and residential construction were the main sources of growth, but the surprises were stronger-than-anticipated fixed investment and less business inventory reduction.

At the same time, inflation remains tame. The overall GDP price index came in at 1.0% annualized. “That’s not much of a cushion for an economy that still has a lot of slack,” says CIBC World Markets. “Although growth is picking up, deflation risks are still well in evidence.” Nesbitt also warns that the Fed’s deflation concerns remain alive.

“Overall, today’s report shows that consumers kept their wallets open and that businesses were on a better footing than expected during April-June,” TD says. “But, the second quarter is now history, so the real question is where the U.S. economy is headed.”

TD says that it continues to expect an acceleration of economic growth into the range of 3.0%-3.5% in the second half of this year.

“The impact of the Bush tax cuts, the stimulative stance of monetary policy and the impact of the prior weakening in the U.S. dollar all point to a pick up in economic activity,” TD says. “Furthermore, the recent evidence of declining jobless claims hints that employment growth may be poised to return in the coming months. However, the stronger-than-expected performance in the second quarter does suggest that the rebound in economic growth may prove more muted than some have been speculating, reflecting the better starting point of the economy.”

CIBC says its expectations for Q3 growth have been rising over the past month as data pointed to an acceleration in demand late in Q2, with the draw-down in inventories beginning to spark a rebound in manufacturing.

“But a 4%+ Q3 will likely give way to a mid-2% final quarter, as the impacts of the one-off tax cut fade, and the drop in funds from mortgage refi activity hits.”

In a separate release, new claims for jobless insurance stayed well below 400,000. “A surprising sign of life in the labour market,” says Nesbitt. “The two reports were very bearish for bonds, despite the low inflation news.”

“From the Fed’s perspective, this morning’s figures were nearly heaven,” Nesbitt concludes. “Low inflation makes their promise to stay on hold appropriate. But, the long-forecasted pickup in growth clearly took shape, presaging a vigorous second half growth rate. So far, so good.”