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Economy spurred by defense spending Original Source Link: (May no longer be active)
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Posted on Fri, Aug. 01, 2003
Spurred by defense spending, economy shoots ahead in second quarter
By JEANNINE AVERSA
The Associated Press
WASHINGTON - Stirring from months of stubborn listlessness, the economy pushed ahead in the second quarter at the fastest pace since last summer.
That, coupled with another drop in new claims for unemployment benefits, raised hopes Thursday that America's economic health was on the mend.
"We're back, baby," said Mark Vitner, economist at Wachovia.
The broadest barometer of the economy, gross domestic product, expanded at an annual rate of 2.4 percent in the April to June quarter, the Commerce Department reported Thursday.
The improvement came after two straight quarters of poor economic growth. GDP had increased at just a 1.4 percent pace in the final quarter of 2002 and the first three months of this year.
The pickup reflected stronger consumer and business spending and the biggest jump in defense spending since 1951.
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 had fallen and suggested that the pace of layoffs was stabilizing.
The pair of reports reinforced hope that the economy -- shedding war and other uncertainties that had bogged it down -- would gain more traction in the second half of this year.
"It finally appears as if the economy is taking a turn for the better," said Stuart Hoffman, chief economist at PNC Financial Services Group. "The economy is like a runner getting a second wind. It isn't going to be darting ahead, but it will be moving at a faster pace."
On Wall Street, the reports lifted stocks. The Dow Jones industrials gained 33.75 points to 9,233.80. The Dow and the Standard & Poor's 500 index completed a five-month winning stretch, something they hadn't accomplished since 1999.
Federal Reserve Chairman Alan Greenspan and private economists think the economy will stage a 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, economists said. Some are predicting a growth rate in the second half in the range of 3.5 percent to 4 percent or more.
GDP measures the total value of goods and services produced within the United States. The 2.4 percent second-quarter growth rate, stronger than the 1.5 percent pace that economists were predicting, marked the best performance since the third quarter of 2002.
Amid signs of economic improvement, analysts expected that the Federal Reserve would hold short-term rates steady at a 45-year low of 1 percent at its next meeting on Aug. 12. The combination of lower borrowing costs, fatter paychecks and tax incentives might spur consumers and businesses to spend and invest more, analysts said.
Even if that turns out to be the case, the job market is likely to remain sluggish, economists said. The unemployment rate hit a nine-year high of 6.4 percent in June. It could hover in that range and possibly move higher in the months ahead, economists said, because job growth probably will not be strong enough to handle an influx of people looking for work amid an improved climate.
Democrats point to the lackluster job market as evidence that the president's economic policies aren't working and that his tax cuts are digging the country's budget deficit hole deeper. "This administration is in total denial," said Sen. Kent Conrad, a North Dakota Democrat.
But the Bush administration insists that the tax cuts will help the economy grow and eventually create jobs. "The economy is clearly moving in the right direction," said Commerce Secretary Don Evans.
A second Labor Department report showed U.S. workers' wages and benefits had grown 0.9 percent in the second quarter, compared with a 1.3 percent increase in the previous quarter, as companies kept a sharp eye on costs.
The stagnant jobs market so far hasn't taken a big bite out of consumer spending, a main force keeping the economy going.
Consumers in the second quarter increased their spending at a 3.3 percent rate, up from a 2 percent 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 22.6 percent.
Especially encouraging were signs that the big freeze on business spending was beginning to thaw. Businesses, which cut spending on equipment and software in the first three months of this year, increased such investment in the second quarter at a 7.5 percent rate. That marked the biggest increase in three years.
And after six straight quarters of slashing spending on new plants and structures, businesses boosted such spending by a 4.8 percent rate 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 said.
"The long drought in capital spending is officially over," said Ken Mayland, president of ClearView Economics.
Another big factor behind the rise in second quarter GDP: a stunning 44.1 percent growth rate in government defense spending, the largest increase since the third quarter of 1951.
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