Economic Growth Estimate Is Raised
The U.S. economy is picking up speed at a faster pace than previously believed, fueled by government outlays for the war in Iraq and consumer spending on cars and home improvements, the Commerce Department reported Thursday.
The government revised its estimate of economic growth during the second quarter to a 3.1% annual rate, a considerable improvement over the initial second-quarter estimate of 2.4% issued just a month ago.
The size of the revision exceeded the expectations of private economists. And the latest estimate of growth in the quarter is more than double the 1.4% rate recorded during the two previous quarters.
“The future is looking a little brighter than it was before,” said senior economist Ken Matheny of Macroeconomic Advisers in St. Louis. “It’s almost a dead cinch that we’re going to have pretty healthy gains in the third quarter.”
But the second-quarter pick-me-up wasn’t stout enough to cause an improvement in the flagging job market.
The Labor Department reported that initial claims for unemployment benefits rose 3,000 to a seasonally adjusted 394,000 last week, suggesting that the economic gains of recent months haven’t prompted many employers to hang help-wanted signs in their windows.
“This is not just a jobless recovery; it has been almost a job-shedding recovery,” said economist Jay Feldman at Credit Suisse First Boston in New York. “There are all sorts of reasons to be encouraged about the economy’s prospects over the next six months. But we’ll have to wait and see about jobs.”
President Bush acknowledged that unemployment had remained stubbornly high 21 months after the official endpoint of the 2001 recession.
“The president is pleased to see that the recovery appears to be taking hold,” said White House Deputy Press Secretary Claire Buchan. “But he isn’t satisfied. And he won’t be satisfied until every American who wants to find a job can do so.”
Buchan told reporters in Crawford, Texas, where the president was wrapping up a monthlong stay at his nearby ranch, that Bush wanted Congress to take additional steps that he believed would spur the economy, such as enacting an energy policy and tort reform.
Economists said they were encouraged that the number of new unemployment claims has remained below 400,000, but warned that a significant improvement in employment may be months away -- perhaps well into the 2004 presidential election cycle.
“It’s going to be nip and tuck on that issue,” said senior economist Ed McKelvey at Goldman, Sachs & Co. in New York, noting that some of the factors behind the recent boost could prove fleeting.
“For the next six months, it will probably feel like everything is going the administration’s way,” he said. “But in 2004 ... that’s going to fade.”
Some of the steam that propelled the economy in the second quarter will be lost as people finish spending the Bush child tax credit rebates, mortgage refinancings continue to fall victim to higher interest rates and military spending stabilizes.
Stock traders were mildly heartened by the second-quarter growth spurt. The Dow Jones industrial average gained 40.42 points to close at 9,374.21.
Treasury bonds rallied, but other sentiments were at work: The rise in unemployment claims, along with a downward revision in a key inflation index, signaled that the recovery wasn’t accelerating fast enough to increase upward pressure on interest rates.
The Commerce Department’s revised estimate of the nation’s gross domestic product for April, May and June reflected the beneficial economic repercussions of a 45.9% increase in government spending on defense, most of which was attributable to the war in Iraq and the initial costs of reconstruction. It was the biggest quarterly increase in defense spending since the Korean War.
Consumer spending on big-ticket durable goods also surged, by 24.1%. Economists said consumers responded enthusiastically to aggressive incentives offered by auto manufacturers and used the proceeds from mortgage refinancings to pay for new furniture and appliances.
“With cars, it’s incentives, incentives, incentives. Americans still love a deal,” said Merrill Lynch & Co. senior economist Gerald Cohen in New York.
In the case of mortgage “refis,” Cohen said, “much of the money is spent on home improvements. You’re borrowing money from your house to make it look better.”
A broad measure of business investment spending advanced 8.0% in the second quarter. Inventories declined, setting the stage for increased production down the road as businesses scramble to restock their shelves.
*
Times staff writer Edwin Chen in Crawford, Texas, contributed to this report.
