U.S. Economic Growth Beats Forecasts

The U.S. economy grew at a 2.4% annual rate this spring on the strength of shop-till-you-drop consumption, a pickup in business investment and the biggest jump in defense spending since the Korean War, the Commerce Department reported Thursday.

April-through-June growth of the gross domestic product, a measure of all goods and services produced in the U.S., was nearly twice what economists had expected and substantially greater than the 1.4% pace of the previous two quarters.

The latest growth number was seized upon by all sides in the brewing presidential campaign.

Speaking for the Bush administration, Commerce Secretary Don Evans said the 2.4% figure showed that “our economy is clearly moving in the right direction.” President Bush said Wednesday that he saw “hopeful signs” that a more-vigorous recovery was in the offing.

Sen. Kent Conrad (D-N.D.), the ranking Democrat on the Senate Budget Committee, countered that the growth was largely the product of defense spending and hence temporary.

“Sadly, the second-quarter growth rate, minus this one-time defense boost, is yet more evidence the Bush economic program of deficits, debt and denial is not working,” Conrad said in a statement.

Perhaps the best news in the new report was the appearance of the first broad-based pickup in business investment in nearly three years. Not only did firms boost purchases of equipment and software by 7.5% in the quarter, but they also defied expectations by plunking down nearly 7% more for buildings, Commerce Department data showed.

In contrast to every other recession of the post-World War II era, the most recent started with a sudden drop in business investment. Analysts have been waiting ever since for firms to resume expansion.

“This is better than anything we’ve seen in some time,” Michael J. Moran, chief economist of Daiwa Securities America Inc., said of the improvement in business capital spending.

Well over half the latest quarter’s growth -- 1.4 percentage points of the 2.4% total -- was because of a big jump in federal spending, largely the product of the war in Iraq.

Overall, federal spending climbed 25.1%, the biggest increase since 1967. Defense spending rocketed 44.1%, the biggest rise since 1951, during the Korean War.

But analysts suggested that such strong increases were unlikely to be sustained.

“We were looking for a bounce in defense and we got it with a vengeance,” said Richard Berner, chief U.S. economist with Morgan Stanley. “The question is: Is this a one-time thing or is it going to continue?”

Separate from the growth report, there were additional signs Thursday that the economy was finally picking up steam:

* Initial claims for unemployment benefits declined by 3,000 to a five-month low of 388,000 in the week ended July 26, the Labor Department reported. Analysts cautioned that July claims figures are often distorted, but it was the third straight monthly decline, a sign that the labor market may be stabilizing.

* An industry report suggested the nation’s long-depressed manufacturing sector may finally be recovering. The Chicago purchasing managers’ index climbed for the third consecutive month to 55.9 last month from 52.5 in June. The national purchasing managers’ report is due today.

* Help-wanted ads, considered an early indicator of improvement in the job market, are on the rebound, although just barely. The Conference Board’s help-wanted index rose to 38 in June from 35 in May.

Investors greeted the latest economic news by driving stock prices up and bonds down. But the stock rally faded late in the day. The Dow Jones industrial average rose as much as 161 points, but closed with a gain of 33.75 points at 9,233.80.

Prices of U.S. Treasury bonds tumbled, driving yields higher, as investors feared that the economic data could mean stronger borrowing demand ahead. The 10-year Treasury note yield, a benchmark for mortgage rates, ended at 4.40%, up from 4.31% on Wednesday. The yield hit a one-year high of 4.44% on Tuesday.

Analysts said the latest quarterly growth figure indicates that corporate America is continuing to make big strides in boosting productivity, or output per hour worked, to at least a 4% annual rate. Although that’s good news for consumers and investors, it means the economy will have to grow at a much faster rate before it will need more workers.

“That has very positive implications for the economy, but not the labor market,” said William Dudley, chief U.S. economist at Goldman Sachs in New York.

Dudley and others estimated that the economy would have to post a growth rate of 4% or higher to lower the unemployment rate, which stood at a nine-year high of 6.4% in June. July’s rate is to be released today.

A separate report Thursday suggested the consequences of job market weakness. The Labor Department’s employment cost index showed that although employers’ total compensation costs rose 0.9% last quarter, most of the increase was for benefits, not wages and salaries.

Besides business and government, the big contributor to the second-quarter growth rate was, as always, the American consumer.

Overall, consumers boosted their spending 3.3% during the quarter. But virtually all the increase was in the purchase of durable goods, which rose 22.6%.