GDP is 2.4%, Manufacturing Expands, Joblesss Claims Fall, Stocks Surge on News (Daschle Suicidal)

THE WALL STREET JOURNAL ^ | July 31, 2003 | ONLINE NEWS ROUNDUP

[Pubbie]

WASHINGTON -- The economy experienced a growth spurt in the second quarter amid the largest jump in defense spending since the Korean War. Business spending also picked up.

Gross domestic product, a measure of all the goods and services produced in the U.S., rose at a 2.4% annual rate, much faster than the 1.4% pace in the previous two quarters, the Commerce Department said Thursday.

Economists had expected GDP to rise 1.4% again, according to a survey by Dow Jones.

Spending by the federal government jumped 25.1%, the largest increase since 1967. That jump was attributed to a 44.1% rise in defense spending, the largest since the Korean War, due to the war in Iraq. Federal spending was more than enough to offset a slight decline in spending by state and local governments. The increase in government spending added 1.4 percentage points to GDP growth for the second quarter.

In a separate report, the foundering labor market showed signs of strengthening. Initial jobless claims dropped by 3,000 to a five-month low of 388,000 in the week that ended Saturday, the Labor Department reported. That marked the third straight week of declines, a sign that the labor market may be stabilizing. Economists were expecting an increase of 14,000 claims.

The four-week average of jobless claims, which smooths out weekly fluctuations, declined by 11,750 to 408,750, the lowest level in nearly five months.

And a report from purchasing managers in Chicago offered hope for a laggard in the economic recovery – the manufacturing sector. The Chicago purchasing-managers index rose for the third straight month to 55.9 in July from 52.5 in June. While the report is regional, it bodes well for a national reading on the sector, due out Friday morning. It also prompted a number of economists to revise their estimates for that report from the Institute of Supply Management.

Bill Quan, economist at Mizuho Securities in New Jersey, said in a research note, "In light of today's report, we have revised upward our forecast for tomorrow's NAPM report" to 52.0 in the headline index from 49.8 in June.

On the Mend?

Thursday's reports offered some hope that the economy, shedding war and other uncertainties that had bogged it down earlier in the year, will gain traction in the second half.

"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.''

However, the Commerce Department will revise its GDP estimate two more times and cautioned that Thursday's report is based on incomplete information.

Indeed, "They are very encouraging numbers," said Cary Leahy, an economist at Deutsche Bank, but "I wouldn't say happy times are here again because we've had so many false starts in the last 12 to 18 months."

In addition to increased government spending, the GDP report showed that businesses started spending again across all categories and that consumers picked up their spending pace as well.

Consumer spending, as measured by personal-consumption expenditures, rose at a 3.3% annual rate during the quarter, after rising 2% in the first quarter. Consumer spending accounts for two-thirds of the economy.

Spending on durable goods, which are items such as cars and appliances that are meant to last three years or more, jumped 22.6% after falling by 2% in the previous quarter. Spending on nondurable goods ticked up by 0.1%.

The freeze on business spending appeared to thaw as companies increased spending by 6.9%, the fastest pace in three years. Within that category, spending on computers and equipment rose 7.5% and spending on structures climbed 4.8%. The gain in business spending helped offset a drop in inventory accumulation during the quarter. Businesses inventories fell by $17.9 billion after a gain of $4.8 billion in the first quarter. The falloff in inventories knocked 0.77 percentage point off GDP growth.

James Glassman, chief economist at JP Morgan, said businesses are unlikely to keep cutting inventories and will have to boost production and hire more workers to meet increasing consumer demand. When this happens it will add substantially to overall economic growth.

"It's the story that's behind the [overall] numbers that's impressive," he said.

Real final sales -- GDP less the change in private inventories -- rose at a 3.2% annual rate, after a 2.3% rise in the previous quarter.

Employment Costs Ease Up

Another Labor Department report released Thursday showed that U.S. employers incurred a much smaller increase in the cost of hiring and retaining workers during the second quarter than they did in the previous quarter. The employment-cost index climbed a seasonally adjusted 0.9%, after a 1.3% gain in the previous period, the Labor Department reported. Benefit costs increased 1.4% and continued to substantially outpace the 0.6% gain in wages and salaries for civilian workers.

In the GDP report, gains in business, government and consumer spending were tempered by a decline in exports, which fell by 3.1%. Imports increased 9.2%. A gain in imports subtracts from overall economic growth.

Inflation was on the decline as energy prices settled down. The price index for gross domestic purchases rose at a 0.3% rate after rising at a 3.4% rate in the first quarter.

However, the price index for personal consumption, a gauge watched closely by the Fed, rose at a 0.9% pace, slower than the 2.7% rate registered in the previous quarter. Fed policy makers in recent months have voiced concern about the threat of deflation.

[ChadGore]

Thank you GWB !

[oceanview]

yes, alot of that is true. but I think it is localized to the industry segments where the job losses are occurring. also remember that americans are mostly a selfish people. if you think that a tenured public schoolteacher making $100K (where I live) gives a damn that IT jobs are being sent offshore and alter their own spending habits at all, they do not.

[Wolfstar]

Daschle suicidal

Hehehehehehehe... To bad, Tommy. So sad. Life sure is a bee itch when you're on the losing side of history.

[holdmuhbeer]

Your are exactly right. People who work at Wally world can't buy the same things as IBMers. Even if they could the money spent helps China more than it helps americans.

[bk1000]

'Anytime a large company feels secure in cutting pay for people who have nearly thirty years of service you can bet that they are not worried that people might find a better job and leave. What do they know that so many others don't?'

They know that there are illegal immigrants lining up to
do the job for a third less. They know there are legions of
20-something college grads out there that will work for less. They feel that, being as how times have changed, younger, more up-to-date workers are better than those with years of experience in the old ways. Some of this is true. I work with many 'experienced' people who will do little more than the minimum, and complain about that. Many who have not been directly affected by this maintain a sense of entitlement regarding their jobs. Manufacturers have left our workforce and with good reason. Globalization and union greed are killers. More immigrants arriving every day.

[rwfromkansas]

Granted, but business spending and consumer spending also increased a decent amount.

[rwfromkansas]

Again, you are focusing on one part of the GDP. Business investment and consumer spending also increased decently.

[Jumper]

Great News at a full one percent growth in the US Economy, adjusted after removing government spending! In Europe, they are growing at 0.01% in France and Germany and the European growth in GDP includes goverrnment spending. The world is technically in a recession and the US is actually growing!

If you are keeping tab, Europe (European Union) has 370 million people while the US had 290 million people - and our economy is growing at approximatley (and projected to continue to grow at the same rate of) four percent annually. In actual terms, we will soon exceed the size the entire european economy!

For all those people who are upset that all the jobs are low paying in the US, my advice to them is to be a part of the job creation sector rather than lazy wage earners.

[Nucluside]

I did follow my comment with another that was commensurate with yours. Cheers, AK Nucluside