US economy shows vigor in Q2, but seen flagging

Analysis

Strong exports and consumer spending supported by government stimulus checks drove the US economy up at a solid 3.3% annual rate in the second quarter, much faster than first thought, but growth is expected to flag as those factors fade.

The US Commerce Department on Thursday said consumer spending and net exports were more vigorous than initially estimated and that inventories fell less sharply. A month ago, it said US gross domestic product had expanded at a 1.9% rate in the quarter. The upward revision was much sharper than analysts had expected and added to evidence the US economy may skirt the downturn many had forecast as a result of a deep decline in housing markets, tight credit and high energy and food prices.

The data and a drop in oil prices powered a big rally on Wall Street. The blue chip Dow Jones industrial average .DJI closed up 212 points, or nearly 1.9%. At the same time, the dollar rose and bond prices slipped as money moved into stocks. “It’s clear that the second quarter not only wasn’t a recession quarter, it was actually a very robust quarter,” said Michael Englund, chief economist for Action Economics in Boulder, Colorado.

GDP had grown at a sluggish 0.9% rate in the Q1 after a 0.2% contraction in the final three months of 2007. The Q4 of last year was the weakest since July-September 2001, when the economy was in recession. The data did little to alter financial market bets that the US Federal Reserve would hold interest rates steady into next year. The Fed has held benchmark borrowing costs at a low 2% since April to bolster the struggling economy.

Many analysts worry that exports and consumer spending, which have buoyed the economy, are likely to taper off in the second half of the year as spending supported by the tax rebate program dries up and weakening global growth and a stronger US dollar crimp demand from abroad. “This number seems to overstate the underlying strength even though exports are obviously strong,” said James O’Sullivan, an economist at UBS Securities in Stamford, Connecticut.


WELCOME LIFT

Consumer spending, which fuels two-thirds of the US economy, grew at an upwardly revised 1.7% rate in the Q2, rather than the 1.5% pace first reported. Meanwhile, exports grew at a 13.2% annual rate instead of the 9.2% pace initially estimated. In all, a narrowing trade gap contributed more than 3 percentage points to GDP growth.

Housing, however, continued to be a sore spot. Residential construction fell at an annual 15.7% pace, slightly more than the 15.6% decline reported earlier. Meanwhile, inventories dipped at an annualized $49.4 billion in the quarter, rather than the $62.2 billion drop first reported, a possible sign that businesses are less pessimistic than believed. In a separate report, the Labor Department said the number of US workers filing new claims for jobless benefits fell by 10,000 last week, although new claims remained at elevated levels, indicating a weak labor market.

Continued claims -- people remaining on the benefits rolls after drawing an initial week of aid -- hit the highest level since November 2003, although the figure may have been lifted by a program extending the duration of unemployment benefits. The economy’s sluggishness has hit the job market hard. Employers have shed a total of almost half a million jobs this year, and unemployment hit a four-year high of 5.7% last month. (Reuters)

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