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Economy stronger in second quarter

Thursday, September 30, 2004

WASHINGTON -- The economy grew at a faster pace this spring than previously thought, but was at its weakest showing in more than a year, providing ammunition to both candidates in the final weeks of the presidential race.

The 3.3 percent annual growth rate of gross domestic product in the April-June period was stronger than the 2.8 percent pace estimated last month, the Commerce Department said Wednesday. GDP is the country's total output of goods and services.

Still, the improvement was significantly lower than the first quarter's 4.5 percent annual rate, as rising energy prices caused consumers to cut back sharply on their overall spending.

The second-quarter boost to the nearly $11.7 trillion economy came from expanded business inventories and investments, an increase in exports and a drop in imports.

"The economy is doing better than many anticipated," said Sung Won Sohn, economist at Wells Fargo & Co. "And the better news is that economic growth will accelerate." Sohn said he expected a third-quarter growth rate approaching 4 percent.

The report sent stocks higher, with the Dow Jones closing up nearly 59 points and the Nasdaq up 24 points.

Also Wednesday, the International Monetary Fund said the U.S. economy should grow by a solid 4.3 percent this year. That prediction marked a slight downward revision from the IMF's spring forecast that growth would be an even faster 4.6 percent this year.

The government's first estimate of third-quarter GDP will be released Oct. 29, four days before the election.

Treasury Secretary John Snow said the GDP report was "good news for the U.S. economy and American families." He said the "fundamentals of the economy are solid and we are in a period of rising prosperity and strong growth."

Federal Reserve chairman Alan Greenspan has called the early summer slowdown a "soft patch" and predicted the economy will rebound. The Fed raised interest rates last week for the third time since June. But some private economists worry his forecast might be overly optimistic given a renewed surge in energy costs.

The price of crude oil had topped the $50-per-barrel mark this week, a record in dollar terms, but settled below. Analysts see surging oil prices as a major threat to the expansion because the more consumers spend on energy, the less they have to spend on other goods.

Inflation showed a slight increase in the spring. A gauge that is tied to GDP rose at an annual rate of 3.2 percent, compared with 2.7 percent in the first quarter.

"Slower growth is most visible at shopping malls and in new car showrooms," said Peter Morici, an economist and international business professor at the University of Maryland.

Consumer spending, which accounts for two-thirds of total economic activity, came to a near standstill in the spring. Spending grew at an annual rate of just 1.6 percent, the slowest pace in three years. The government was releasing new figures Thursday.

Some analysts say business spending is taking up the slack for consumers, and will help support economic growth. "The consumer spending spree is over," Sohn said.

Other economists were concerned that the large inventories businesses have accumulated could be a drag on growth in the fourth quarter, especially with the drop in consumer spending.

The 3.3 percent overall growth rate in the second quarter followed four quarters of extraordinary growth as the economy expanded at rates of 4.1 percent in the spring of 2003 and then 7.4 percent in the summer, the largest surge in 20 years. The rate was 4.2 percent in the fourth quarter last year and 4.5 percent in the first three months of this year.

Bush says his three major tax cuts have lifted the country out of recession, and are responsible for such strong economic growth.

"The president's pro-growth policies have put America on the path to prosperity and even stronger growth," said White House spokesman Scott McClellan. "The economy is moving forward, growing over the last year at a rate as fast as any in the last 20 years."

But Kerry has said the tax cuts benefited wealthy people at the expense of everyone else, and failed to generate the millions of jobs Bush promised. There are 913,000 fewer jobs than when Bush took office in January 2001.


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