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AP
Economy Growth Is Best in a Year
Friday July 27, 11:50 am ET
By Jeannine Aversa, AP Economics Writer Economy Springs Out of Rut and
Grows at 3.4 Percent Pace, Best Showing in More Than a Year WASHINGTON (AP)
-- The economy snapped out of a lethargic spell and grew at a 3.4 percent pace
in the second quarter, the strongest showing in more than a year. A revival in
business spending was a main force behind the energized performance.
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The new reading on gross domestic product, released by the Commerce
Department on Friday, marked a big improvement from the first three months of
this year, when economic growth skidded to a near halt at just a 0.6 percent
pace, the slowest in more than four years. At the White House, President Bush
said job growth has been strong and the economy is resilient and flexible. "I
want the American people to
take a good look at this economy of ours," crowed Bush, whose economic
stewardship has received weak marks. Stronger spending by businesses and
government powered the rebound in the April-to-June quarter. Individuals,
however, tightened their belts as they coped with high gasoline prices and the
ill effects of the housing slump. The sour housing market continued to weigh on
national economic activity in the spring but not nearly as much as it had in
previous quarters. Inflation -- outside a burst in energy and food prices --
moderated. On Wall Street, stocks seesawed in early trading Friday -- one day
after the Dow Jones industrial average suffered its second biggest drop of the
year, plunging by 311.50 points. Treasury Secretary Henry Paulson called the
market turbulence a "wake up call" to investors to re-examine their degree of
risk. "Lenders need to be very aware of the risks. Borrowers need to be aware
of risks. I would submit people are more aware of those
risks and the need for discipline today than maybe they were a month or two
ago," Paulson said in a briefing with reporters. "So again let's keep eye on
the very strong underlying economy, which puts us in a position of strength,"
he added. The second quarter's performance was better than the 3.2 percent
growth rate economists were expecting. It was the strongest showing since the
first quarter of 2006, when the economy expanded at a brisk 4.8 percent annual
rate. Gross domestic product measures the value of all goods and services
produced in the United States. It is considered the best barometer of the
country's economic fitness. "I think the confidence level of companies has
come back. That's why there was a modest pickup in capital spending," said Ken
Mayland, president of ClearView Economics. Even as the economy picked up
speed in the spring, inflation managed to settle down. An inflation gauge
closely watched by the Federal Reserve showed "core" prices --
excluding food and energy -- rose at a rate of just 1.4 percent in the second
quarter. That was down sharply from a 2.4 percent pace in the first quarter and
was the smallest increase in four years. That should help ease some inflation
concerns. Fed Chairman Ben Bernanke has said the biggest threat to the economy
is if inflation doesn't recede as policymakers anticipate. Out-of-control
prices are bad for the economy and the pocketbook. They eat into paychecks,
erode purchasing power and reduce the value of investments. The Fed has kept
a key interest rate at 5.25 percent for more than a year. Economists predict
that rate will stay where it is through the rest of 2007. Bush has been
trying to counter weak public-approval ratings for his handling of the economy.
Only 37 percent approve of his performance, close to a record low, according to
a recent AP-Ipsos poll. Problems in the troubled housing and mortgage markets
have rattled investors in recent days. Friday's
report showed that the ailing housing market is still crimping economic
activity, but not as much as it had. Investment in home building was cut by
9.3 percent, on an annualized basis, in the second quarter. That wasn't nearly
as deep as the 16.3 percent annualized drop in the first quarter. It was the
smallest cut in just over a year. Businesses, meanwhile, regained their
appetite to spend and invest in the second quarter. They boosted their
spending on new plants, buildings and other commercial construction at a
whopping 22.1 percent rate, the most in 13 years. Investment on equipment and
software posted a 2.3 percent growth rate, an improvement from a meager 0.3
percent growth rate in the first quarter. Businesses also replenished their
inventories in the second quarter, adding to overall economic growth. Stronger
export growth helped the nation's trade picture and added to the economy's
momentum. Also contributing to the second quarter's rebound: Government
spending increased at a 4.2 percent pace. That compared with a 0.5 percent
annualized drop in the first quarter. However, consumers, whose spending
largely prevented the economy from stalling out in the first three months of
this year, lost energy in the second quarter. They boosted spending at a pace
of just 1.3 percent, the smallest since the final quarter of 2005. High gas
prices and fallout from the housing slump are beginning to take their toll on
peoples' appetite to spend. Still, a solid jobs climate -- the nation's
unemployment rate is at a relatively low 4.5 percent -- should help cushion
some of these negative forces. The government also issued annual revisions
that showed the economy grew at an average annual rate of 3.2 percent from 2003
through 2006, or 0.3 percentage point less than previously estimated. The
revisions are based on more complete data. Last year the economy grew by 2.9
percent -- slower than the 3.3 percent increase previously
calculated. The new figure marked the weakest annual growth since 2003 and
underscored the depth of the housing slump.
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