U.S. Economic Expansion Displays Steady Strength

The U.S. economy grew at a solid 3.4% annualized rate in the second quarter, the Commerce Department said Friday in a report suggesting that output and job creation would speed up as businesses replenished depleted inventories of goods.

The government’s initial estimate of growth in gross domestic product met economists’ expectations but fell short of the first quarter’s 3.8% pace and the revised 4.2% growth posted for all of last year.

But it was the ninth straight quarter the economy exceeded its long-term growth rate of about 3%. And although the nation can’t match China’s gazelle-like 9.5% clip, it is outperforming most other industrialized nations and topping average growth during the booming 1990s.

And analysts said the economy was actually stronger than it appeared, as a sharp drawdown of inventories during the quarter depressed the headline growth number.

“The economy continues to be extremely resilient in the face of Federal Reserve tightening and almost $60-a-barrel oil prices,” said Steven A. Wood, chief economist at Insight Economics in Danville, Calif.

The Bush administration lauded the report as evidence that its economic policies were working.

“America’s economy is on the right path,” Treasury Secretary John W. Snow said.

The report showed broad strength. Business spending surged 9% after jumping 5.7% in the January-to-March quarter. Consumer spending rose 3.3%, down from the previous quarter’s 3.5% but still strong in the face of gasoline price shocks.

Exports also grew while imports shrank, narrowing the trade deficit and making trade a positive contributor to gross domestic product for the first time in two years.

With a relatively weak dollar making U.S. exports cheaper, “we are in a more competitive position against many countries,” said Gary Thayer, chief economist at brokerage A.G. Edwards. “This is the first of maybe several quarters of good trade numbers.”

Most notable in the report was a sharp annualized decline of $6.4 billion in inventories of unsold goods -- the first such drawdown in two years.

Fearing a slowdown earlier in the quarter, businesses curbed production.

But consumers kept buying, whittling store shelves. Inventories of autos, for example, were pared through aggressive sales promotions by General Motors Corp. and others.

The overall inventory reduction cut about 2.4 percentage points from second-quarter growth.

“The replenishment of diminished inventories soon will quicken economic activity,” John Lonski, chief economist at Moody’s Investors Service, said in a report Friday.

He added that inventory depletion of the size seen in the second quarter normally occurred during recessions -- efforts to replenish such inventories “helps to power the economy out of a recession.”

Some analysts are forecasting that growth in the current July-to-September period could hit or top 4%.

A separate report Friday suggested that inflation remained tame. The employment cost index, a broad gauge of what employers pay in wages and benefits, rose 0.7% in the second quarter, the Labor Department reported. That matched the first quarter’s advance, equaling the smallest increase since March 1999. Those figures are not annualized.

Meager wage and benefit gains “are not so good for workers, but it shows that businesses are finding ways to restrain costs,” economist Thayer said.

But you can’t have your economic cake and eat it too, analysts said.

With a strong economy, don’t expect the Fed to stop hiking interest rates anytime soon, they said.

Concerns about higher interest rates were partly blamed for declines in major stock indexes Friday. Bond yields ticked higher.

Other reports Friday also pointed to strong growth.

The Chicago purchasing managers index, measuring the strength of Midwestern manufacturing, jumped to 63.5 in July, well above 53.6 in June.

The University of Michigan’s index of consumer sentiment rose to 96.5 in July, the year’s highest level and up from 96 in June.

However, it turns out the recovery from the 2001 recession wasn’t as robust as earlier believed.

The Commerce Department revised downward by 0.3 percentage point to 2.8% its estimate of average growth between 2001 and 2004.