Poverty rises; good growth surprises

Saturday, September 27, 2003

WASHINGTON -- The U.S. economy, powered by a red-hot housing market and a huge dose of spending for the war in Iraq, grew at a surprisingly strong 3.3 percent clip last quarter and raised hopes for an even better performance the rest of the year.

The increase announced Friday in the gross domestic product for the April-June period represented an upward revision from a 3.1 percent estimate a month ago, reflecting greater strength than previously thought in housing and several other sectors.

Analysts said growth in the July-September quarter would be at a significantly higher rate, fueled by President Bush's third round of tax cuts, which took effect in July, and continued low interest rates from the Federal Reserve, a potent stimulus combination that has helped to push auto and home sales to record levels.

"The economy is firing on all cylinders," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "The strong economic growth we are predicting in the future should create some new jobs."

That would be welcome news to Bush, who is facing stepped-up attacks from Democratic presidential candidates who contend he has the worst jobs record since Herbert Hoover was president.

The better-than-expected GDP report failed to lift spirits on Wall Street, where stocks extended their slide. The Dow Jones industrial average fell 30.88 points to close at 9,313.08, wrapping up a week in which the Dow lost 3.4 percent, its worst weekly performance in six months.

Many analysts said based on the GDP revisions and reports on activity in July and August, they now believe the economy is growing at a rate in excess of 5 percent in the current quarter and should be able to maintain growth above 4 percent in the final three months of the year.

That forecast, if it proves to be correct, would represent the strongest back-to-back growth rates since the last two quarters of 1999, a period in which the economy was headed toward a record 10-year long economic expansion.

Since then, however, the United States has endured rough times that began with the bursting of the stock market bubble in the spring of 2000 followed by a recession that started in March 2001.

While the country has officially been out of recession since November 2001, it has yet to mount a sustained rebound strong enough to prompt companies to begin rehiring laid-off workers. Job losses just this year have totaled a half-million workers.

Economists said the new round of government stimulus from the tax cuts and increased military spending coupled with the Fed's low interest rates should be enough to get the economy out of its funk.

"We have seen a real pop in activity in July and August. People have been spending their tax cuts," said David Wyss, chief economist at Standard & Poor's in New York.

Still, analysts cautioned that they have predicted second-half economic rebounds for three consecutive years that have failed to happen as companies and consumers remained uncertain about the future.

In a second report Friday, the University of Michigan said the final reading on its consumer confidence index slipped to 87.7 in September, down from 89.3 in August.

"Higher gas prices and continued job losses had the greatest impact on lower-income households, and these households reported larger declines in confidence," said survey director Richard Curtin.

Mindful that the economy has struggled to mount a sustained rebound, the Federal Reserve has stressed that it plans to leave a vital short-term interest rate, currently at a 45-year low, unchanged for as long as it takes to allow the rebound to gain momentum.

The Fed has leeway in this area because inflation, outside of energy, has fallen to levels not seen in decades.

Friday's GDP report showed that the implicit price deflator, an inflation gauge tied to the GDP, rose at an annual rate of just 1 percent in the second quarter, down from a 2.4 percent rate of increase in the first quarter.

The 3.3 percent GDP growth rate in the second quarter followed two consecutive quarters in which growth averaged an anemic 1.4 percent. Reflecting the prolonged weakness, after-tax corporate profits shrank by 5 percent in the second quarter, the government said.

Among the various GDP components, consumer spending, which accounts for two-thirds of total economic activity, rose at a 3.8 percent rate in the second quarter, with spending on durable goods such as cars shooting ahead at a 24.3 percent rate.

Home construction was rising at a 6.6 percent annual rate in the second quarter.

Military spending, reflecting the war in Iraq, surged at an annual pace of 45.8 percent in the second quarter, helping to push overall federal spending up at a 25.5 percent pace.

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