Steve Quayle News Alerts

July 31, 2003

WASHINGTON (AP) — The U.S. economy, lifted by consumer and business spending, broke out of the doldrums and grew at an annual rate of 2.4% in the second quarter, strongest showing in nearly a year.

And in a second upbeat report, the government said Thursday that new claims for unemployment benefits fell 3,000 to 388,000 in the week ended July 26, second week they were below the 400,000 level that is considered a sign of a weak job market.

The improvement in gross domestic product in the April to June quarter, reported by the Commerce Department Thursday, came after two straight quarters of lousy economic performance. GDP increased at just a 1.4% pace in both the final quarter of 2002 and the first three months this year.

The report reinforced the hope that the nation's economy, shedding war and other uncertainties that had bogged it down earlier, would gain more traction in the second half of this year.

Considered the broadest barometer of the economy's health, GDP measures the total value of goods and services produced within the United States.

The 2.4% growth rate turned in during the second quarter showed more energy than the limp 1.5% pace that economists were predicting. The second quarter's performance was the best since the third quarter of 2002, when economic growth clocked in at a healthy 4% rate.

To give the recovery a push, the Federal Reserve cut its target for a key interest rate by one-quarter percentage point June 25 — to 1%, a 45-year low.

With the economy showing scattered signs of improvement, economists believe the Fed will hold short-term rates steady at its next policy meeting, Aug. 12.

Fed Chairman Alan Greenspan and private economists believe the economy will stage a rebound in the second half this year. President Bush's tax cuts along with rock-bottom short-term interest rates should help on that front, economists say. Some are predicting second-half growth of 3.5% to 4% at an annual rate.

Analysts believe the combination of lower borrowing costs, fatter paychecks and other tax incentives might spur consumers and businesses to spend and invest more.

Even if that turns out to be the case, the job market is likely to remain sluggish economists say. The unemployment rate hit a nine-year high 6.4% in June. It could hover near there and possibly move higher because job growth probably won't be strong enough to handle the influx of people looking for work in an improving economy, experts say.

The stagnant jobs market so far hasn't taken a big bite out of consumer spending, the main force keeping the economy going.

Consumers in the second quarter increased spending at a brisk 3.3% rate, up from a 2% pace in the previous quarter. After trimming spending on big-ticket items, such as cars and appliances, in the first quarter, consumers ratcheted up spending on such durable goods in the second quarter by a whopping 22.6%.

Especially encouraging in the GDP report were budding signs that the freeze on business spending is beginning to thaw. Businesses, which cut spending on equipment and software the first three months this year, boosted such investment in the second quarter at a sizable 7.5% annual rate, biggest increase in three years.

And, after six quarters of slashing spending on plants, office buildings and other structures, businesses boosted that spending 4.8% in the second quarter.

A sustained turnaround in capital investment by businesses is a crucial ingredient to the economy's ability to get back to full throttle, economists say.

The housing market, a continued bright spot of the economy, also helped bolster GDP in the second quarter. Spending on residential projects grew at a rate of 6%, down from the previous quarter's red hot 10.1% growth rate.

The nation's swelling trade deficit was one of the forces restraining the economy in the second quarter. The deficit shaved 1.56 percentage point from GDP in the second quarter.

Another factor holding back second-quarter GDP was a whittling of inventories by businesses. That subtracted 0.77 of a percentage point from GDP. But with inventories lean, businesses will need to replenish them, and that would help economic growth in coming months.

http://www.usatoday.com/money/economy/gdp/2003-07-31-gdp-jobless_x.htm