July 31, 2003
U.S. Economy Grew at 2.4% Annual Rate in 2nd Quarter
By KENNETH N. GILPIN
he nation's economy showed some promising signs of reinvigoration in the second quarter, according to preliminary figures the government released today. But the improvement was somewhat skewed by Washington itself, as military spending posted its biggest three-month increase since the Korean War.
In its first estimate of how the economy performed during the second quarter, the Commerce Department said that gross domestic product, which measures the total value of goods and services produced in the United States, rose at a 2.4 percent annual rate in the April-June period. That rise was well above the 1.5 percent rate of increase that most Wall Street economists had been forecasting.
While the output numbers came as a pleasant surprise, analysts were equally encouraged by a report from the Labor Department, which showed that initial claims for unemployment benefits fell for a second straight week in the period ended July 26.
Jobless claims dropped to 388,000 for the week, down from 391,000 the previous week. More significant, analysts said, is the longer-term trend: initial claims have been trending steadily lower for the last seven weeks.
To most economists, a weekly reading on initial unemployment claims of 400,000 or higher is a strong sign that the economy is in trouble.
"The drop in claims is important, because those of us who are counting on a second-half recovery are looking for some improvement in the labor market," said David Resler, chief economist at Nomura Securities International.
The report on declining jobless claims comes a day ahead the government's closely watched employment report for July. Analysts are anticipating a slight decline in the unemployment rate and little change in the nation's payrolls.
Predictably, reaction in financial markets to today's news was mixed.
Stock investors, who equate improving economic conditions with rising corporate profits, pushed broad market indexes higher. The Standard & Poor's 500-stock index was up 14.90 points, or 1.5 percent, to 1,002.39 around midday.
But bond traders, who fear that stronger economic growth will lead to higher inflation, reacted negatively. Interest rates, which have risen sharply over the last six weeks or so, moved even higher after the data were released. The Treasury's benchmark 10-year note fell nearly a point in price, while its yield, which moves in the opposite direction, rose to 4.43 percent around midday, from 4.31 percent late Wednesday.
Forecasting growth on a quarter-to-quarter basis is always difficult, and estimates by private analysts fell short for the second quarter because no one predicted the huge rise in military spending that was booked during the second three months of the year.
Military spending shot up at a 44.1 percent annual rate in the second quarter, the biggest quarterly increase since the third quarter of 1951. In the first quarter, military outlays fell by 3.3 percent.
The increase in military expenditures was a big reason why federal spending rose by 25.1 percent during the period, the biggest quarterly gain since 1987.
Despite continuing operations in Iraq and Afghanistan, which have a combined cost of about $5 billion a month, analysts said the economic boost from military spending was not likely to be repeated in coming quarters.
But the analysts said they nevertheless remained upbeat about the economy's prospects, because other sectors grew vigorously in the second quarter.
Specifically, economists said they were happy to see a healthy increase in business investment in plant and equipment. And consumer spending, which represents two-thirds of all economic activity, also marched higher.
Nonresidential spending, the broadest measure of investment, rose by an annual rate of 6.9 percent in the second quarter, a sharp reversal from the 4.4 percent rate of decline recorded in the first three months of the year.
It was the strongest advance in investment since the 10.2 percent rate of increase recorded in the second quarter of 2002.
Meanwhile, consumer spending rose by 3.3 percent during the second quarter, helped in large part by a 22.6 percent rise in spending on big-ticket durable goods like automobiles. It was the strongest rate of increase in consumer spending since the 4.2 percent rate of increase recorded in the third quarter of 2002.
Reflecting record-low levels of mortgage interest rates, spending on residential projects rose by 6 percent during the period, the Commerce Department said. While strong, that growth rate is down from a 10.2 percent increase recorded in the first three months of the year. And economists said the recent sharp rise in market interest rates was likely to cool what has been a red-hot housing market in the months ahead.
Indeed, if interest rates move much higher, the rise in the cost of borrowed money could put a crimp in the overall economy, analysts said.
"If yields on the 10-year Treasury note go above 4.75 percent to 5 percent with no change in the inflation picture, that will impact the economy," Mr. Resler said.
Inflation measures released today showed that rising prices are not a problem.
The gross domestic price deflator rose by 1 percent in the second quarter, the Commerce Department said. Another important inflation gauge, the employment cost index, rose by 0.9 percent in the second quarter, down from a 1.3 percent rise in the first three months of the year.
Analysts were also cautious about what the sustained drop in initial unemployment claims really means.
Much of the drop during the most recent week is related to autos, said Ray Stone, a managing director at Stone & McCarthy, an economic consulting firm in Princeton, N.J. "They are trying to produce more autos in advance of the expiration of the United Auto Workers contract in mid-September," he said.
Still, the drop in weekly claims was impressive, he said.
But that does not mean that July employment report on Friday will be very encouraging, Mr. Stone said.
"I think the nonfarm payroll number will be down," when it is released on Friday, Mr. Stone said. "That is primarily due to the fact that public sector employment, particularly in the states, will be lower."
In advance of the employment report, economists' estimates of changes in the nation's payrolls from an increase of 30,000 jobs to a decline of 20,000.
Analysts were also expecting the unemployment rate to slip to 6.3 percent, from 6.4 percent in June, according to consensus estimates. |
