Posted on 07/31/2003 9:09:12 AM PDT by 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.
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This is not too clear to me, but is this the answer to your question? I had/have the same question...
Hey, you're raining on their parade.
Less government purchases, GDP grew at a paltry +0.31%.
The funny thing about this number is that it makes more government spending look like a good thing, and less government spending like a bad thing. Which ironically has some people here cheering bigger government.
State/local purchases declined last quarter. Is that a bad thing? No? Well, it slightly depressed this GDP number.
Some government spending is a good thing -- infrastructure and defense, for example. If we didn't have a military, we could be invaded, and that'd really depress the economy. But that effect is hard to quantify, and to first order all government spending is a misallocation of resources.
Of course it might, since, by the very definition of this statistic, government spending is a good thing.
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