Economy Makes Strongest Showing In A Year

Improvement in the gross domestic product came after two straight quarters of lousy economic growth.

InformationWeek Staff, Contributor

July 31, 2003

4 Min Read

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 of 2003, the strongest showing in nearly a year.

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

"The economy truly does look to be on the mend," said Joel Naroff, president of Naroff Economic Advisors. "With investment coming back, the signs seem to be there for a significant rebound in growth going forward."

Considered the broadest barometer of the economy's health, GDP measure 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.

In another encouraging report, new applications filed last week for unemployment benefits dropped by 3,000 to a five-month low of 388,000, the Labor Department said. It marked the third week in a row that jobless claims went down and suggested that the pace of layoffs is stabilizing.

On Wall Street, the pair of reports gave stocks a lift. The Dow Jones industrials gained 79 points and the Nasdaq was up 17 points in the first hour of trading.

Meanwhile, a second Labor report showed that U.S. workers' wages and benefits grew by 0.9% in the second quarter, down from a 1.3% rise in the previous quarter.

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

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

Analysts believe the combination of lower borrowing costs and 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 of 6.4% in June. It could hover in that range and possibly move higher in the months ahead because job growth probably will not be strong enough to handle an influx of people looking for work amid an improved climate, economists say.

Consumers in the second quarter increased their 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 such spending on "durable" goods in the second quarter by a whopping 22.6%.

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

And, after six straight quarters of slashing spending on new plants, office buildings and other structures, businesses boosted this spending by 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.

Another factor helping out second quarter GDP: a stunning 44.1% growth rate in government defense spending, the largest increase since the third quarter of 1951.

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 off from GDP in the second quarter.

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

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