Economy rebounds in 2Q

August 28, 2008 6:56:41 AM PDT
The economy shifted to a higher gear in the spring, growing at its fastest pace in nearly a year as foreign buyers snapped up U.S. exports and tax rebates spurred shoppers at home. The Commerce Department reported Thursday that gross domestic product, or GDP, increased at a 3.3 percent annual rate in the April-June quarter. The revised reading was much better than the government's initial estimate of a 1.9 percent pace and exceeded economists' expectations for a 2.7 percent growth rate.

The rebound comes after two dismal quarters. The economy actually shrank in the final three months of 2007 and limped into the first quarter at a feeble 0.9 percent pace. The 3.3 percent growth in the spring was the best performance since the third quarter of last year, when the economy was chugging along at a brisk 4.8 percent pace.

Still, the growth pickup is not likely to be seen as a lasting sign that the fragile economy is back on solid ground.

Federal Reserve Chairman Ben Bernanke recently warned the economy will be weak through the rest of this year. A growing number of analysts fear that the country will hit another economic pothole in the fourth quarter, as the bracing impact of the tax rebates disappears. And there are concerns exports could tail off as other countries' economies slow down.

GDP measures the value of all goods and services produced within the U.S. and is the best barometer of the country's economic health.

The economy is the top concern for Americans. Democratic presidential contender Barack Obama favors a second government stimulus package, while Republican rival John McCain supports free trade and other business measures to energize the economy.

Housing, credit and financial troubles have pounded the economy.

In turn, employers have clamped down on hiring, driving the nation's unemployment rate up to 5.7 percent in July, a four-year high. The Labor Department said Thursday that the number of people signing up for jobless benefits declined last week for the third straight period, but claims remained above 400,000, an indicator of a slowing economy.

Employers have cut jobs every month this year and wage growth is trailing inflation. That combination raises concerns about the future of consumer spending, one of the pillars underpinning the economy.

The biggest factor in the second-quarter's rebound was robust sales of U.S. exports to other countries. The weaker value of the U.S. dollar has bolstered those sales. Exports grew at a 13.2 percent pace in the spring. That was much stronger than the government's initial estimate of a 9.2 percent growth rate, and more than double the 5.1 percent growth rate logged in the first quarter.

Imports, meanwhile, fell at a 7.6 percent annualized pace in the spring, as economic troubles in the U.S. crimped demand for foreign-made goods.

The improved trade picture added 3.1 percentage points to second-quarter GDP, the most since 1980.

U.S. consumers boosted their spending at a 1.7 percent pace in the second quarter. That was slightly better than the 1.5 percent growth rate initially report and marked the best showing in nearly a year. Government stimulus checks of up to $600 a person helped energize shoppers who had hunkered down amid the economy's problems.

One of the country's biggest problems - the housing collapse - was evident in the GDP report.

Builders cut back at an annual rate of 15.7 percent in the second quarter- although that was a better showing than early this year and late last year.

Businesses trimmed spending on equipment and software in the spring. And, they reduced investment in inventories, but not as much as initially estimated by the government. That was another factor contributing to the improved GDP reading.

One measure of corporate profits showed companies losing ground in the second quarter. After-tax profits fell 3.8 percent in the spring, compared with a 1.1 percent increase in the first quarter.

An inflation gauge tied to the GDP report showed all prices rising at a rate of 4.2 percent in the second quarter, the same as initially estimated.

Taking out energy and food, prices rose 2.1 percent. That also was unchanged from the government's previous estimate but remained outside the Federal Reserve's comfort zone.

With the economy still coping with fallout from housing and credit problems, the Fed is expected to hold interest rates steady at its next meeting on Sept. 16, and probably through the rest of this year.


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