Economy’s pace speeds up
The U.S. economy bounded back from a winter stumble to grow at an annual rate of 3.4% this spring even as the housing slump appeared for the first time to take a toll on consumer spending.
Propelled by rising exports, business investment and government spending, the pace of growth in April, May and June was the fastest in more than a year and a considerable improvement over the mere 0.6% gain of the first three months of the year, the Commerce Department reported Friday. The latest growth was also somewhat better than economists had expected.
Coming amid the stock market’s continued plunge Friday, the data offered evidence that the economy was not coming unhinged.
But some numbers in the economic report weren’t as upbeat as the overall growth figure.
In particular, consumer spending, which accounts for 70% of the economy’s activity, rose at only a 1.3% rate during the second quarter, less than half the 3.7% pace of the first quarter. Spending on big-ticket durable goods, such as televisions and kitchen appliances, increased only 1.6%, down from the previous quarter’s 8.8% pace.
Economists had been mystified about how consumers could keep boosting their buying even as the value of their most valuable possessions -- their homes -- was skidding.
“The amazing thing about much of the last year was to watch the destruction of residential investment and the imperviousness to it of consumer spending,” said Robert J. Barbera, chief economist at ITG, a brokerage in Rye, N.Y.
That mismatch of trends appears to have ended, he said.
Nonetheless, the government report provided a bright spot to which policymakers and politicians could cling.
President Bush did just that. After meeting with his economic team, he praised the economy as “large, flexible and resilient” and said Americans were benefiting from the pickup in exports.
“People are working, the unemployment rate is down, wages are increasing, so I want the American people to take a good look at this economy of ours,” the president said. “Our pledge to the American people is we will keep your taxes low to make sure the economy continues to remain strong.”
But details of the latest quarter’s growth, together with modest downward revisions in the figures for the gross domestic product back to 2004, suggest the economy is not as strong as it was earlier this decade or in the late 1990s, analysts said.
Revised figures show the economy grew an average of 3.2% a year from 2004 to 2006, or three-tenths of a percentage point slower than earlier estimated. As a result, the country is not enjoying productivity gains, or efficiency increases, quite as large as previously announced.
“It means we can’t grow as quickly as we thought without generating inflation,” said Mark Zandi, chief economist with Moody’s Economy.com.
With smaller productivity gains and with consumers seemingly reining in their spending, most economists say the 3.4% performance of the latest quarter will be the high point of growth for this year and much of next. Most predict a growth pace of about 2% a year during the coming quarters, which some warn will be slow enough to cause unemployment to rise.
The job market has been another area reflecting a mismatch as the economy has grown at a “subpar” rate in 2006 and this year but has still generated new jobs at a reasonable clip, said Stuart G. Hoffman, chief economist at PNC Financial Services Group. He predicted that the mismatch between job growth and overall economic growth would not last.
“I think you’ll see the job market slow down” during the remainder of the year, he said.
If consumer spending did little to drive growth, trade contributed substantially. U.S. exports rose at a 6.4% rate during the quarter while imports fell at a 2.6% rate, according to the Commerce Department. By contrast, in the first quarter, exports rose 1.1% but were outpaced by imports, which climbed 3.9%. The disparities between exports and imports added more than a percentage point to economic growth in the latest quarter and subtracted half a percentage point in the previous quarter.
Business investment increased 8.1% in the second quarter after increasing 2.1% in the first quarter. Business investment in structures jumped 22.1%, the opposite of what happened in the consumer sector, where residential fixed investment, which includes spending on housing, fell 9.3%.
Federal government spending rose 6.7% in the second quarter compared with a decrease of 6.3% in the first.
Defense spending increased 9.5% in the latest quarter, in contrast to a decrease of 10.8% in the previous quarter.
One bit of positive news to come out of the government’s revision of past years’ statistics is that Americans are not as terrible savers as the earlier figures suggested.
At times during the last two years, the nation’s savings rate was originally thought to be as low as minus 2%. But the revisions show it actually has been hovering close to zero, rather than being negative, and that in the most recent quarter it was a positive 0.6%.
