Economy performs better than expected

THE BALTIMORE SUN

Spending by consumers and businesses helped the economy grow at an annual rate of 3.1 percent in the second quarter, a stronger performance than estimated and a positive indicator that the national economy might finally be climbing out of its recent doldrums.

"Considering we were looking a month or two ago [at] trying to reach the 1 percent mark, this is terribly good news," said Peter G. Glassman, a senior economist at Bank One in Chicago. "It's not increasing by a strong number, but it's strong in context."

According to updated figures released by the Commerce Department, economic growth as measured by the gross domestic product - the total value of goods and services produced in the country - was a substantial 0.7 percent higher than the 2.4 percent estimated last month.

Since then, many economists predicted the GDP figure for April through June would be revised upward, but the consensus forecast had been a 2.9 percent annual rate.

The second quarter's growth was the best turnout since the 4.0 percent rate reported in the third quarter of last year.

Much of the quarter's gain came from military spending for the Iraq war. But increased spending by consumers and businesses also helped, economists said.

Consumers have kept the recession and the weak recovery that followed from turning into an extended slump.

The new figures show that consumer spending grew at a rate of 3.8 percent, up from the estimate of 3.3 percent.

"Consumers had been wary before the war. The successful conclusion of the invasion made them feel free to spend again," said Gus Faucher, senior economist with Economy.com in West Chester, Pa.

And they spent the freed-up cash they received from mortgage refinancings and the money they anticipated getting once tax cuts took effect in July, economists said.

Business spending up

Until the second quarter, business spending had been lagging even with low interest rates and tax incentives.

"People have been saying all along the missing ingredient in this economic recovery is business investment," said Richard DeKaser, chief economist with National City Corp. in Cleveland.

Businesses appeared to have put their concerns over the sluggish economy and the war behind them, he said.

Total fixed investments by business, which includes buildings, equipment and software, grew by a rate of 6.9 percent in the second quarter.

Business spending hasn't been nearly so strong since the second quarter of 2000, when the rate was 6.7 percent, DeKaser said.

Business spending is expected to continue strong, and attention will be focused on jobs, he said.

Job prospects

The Labor Department yesterday reported that new claims for unemployment benefits rose by a seasonally adjusted 3,000 to 394,000 last week. For years, experts have considered anything above 400,000 a sign of a contracting job market.

New claims peaked this year at 459,000 in April.

Economists say the job market should improve by late this year or early next year.

"Given the high levels of productivity growth that we have seen, we need to have growth of 3.5 percent to put a real dent in unemployment. We're getting there, and it's definitely a good sign," Faucher said.

The nation's unemployment rate fell to 6.2 percent last month from a nine-year high of 6.4 percent in June.

Maryland's seasonally adjusted unemployment rate rose in July to 4.6 percent from 4.3 percent in June, according to the Bureau of Labor Statistics.

"We still remain one of the healthiest economies in the nation," said Anirban Basu, chairman of Optimal Solutions Group, an economic and policy consulting firm in Baltimore.

Maryland's unemployment rate has trailed the nation's throughout the recession that ended November 2001 and the lackluster recovery that has followed.

Maryland has benefited from its proximity to Washington, and from increased defense spending, Basu said.

Demographic edge

It has demographic advantages, too, he said. Maryland is a highly affluent state, with residents' income the third-highest in the country, and residents have the money to take advantage of low-interest loans, he said.

Basu added that the state has a highly educated work force, which is less vulnerable to job losses in a weak economy.

Economists expect greater growth trends for the rest of the year.

"We have so many factors going the economy's way," Glassman said.

Inflation is expected to be kept low, and the Federal Reserve is not likely to raise short-term interest rates for some time.

Consumer 'war chest'

Consumer spending is expected to continue. Sung Won Sohn, chief economist with Wells Fargo & Co. in Minneapolis, said consumers have a virtual "war chest," increasing their holdings in cash and cash-like investments by $722 billion in the past two years.

On top of that, the tax cut will put $61 billion into consumers' hands in the second half of this year and another $149 billion next year, he said.

Glassman predicts the economy will grow by an annual rate of 4.1 in the third quarter and 5.0 in the fourth.

DeKaser expects a stronger third quarter with a 5.6 percent annual rate, before pulling back to 3.5 percent to 4 percent in the fourth quarter.

Despite the good economic news and healthy outlook, Wall Street didn't seem impressed.

The Dow Jones industrial average, an index of 30 blue-chip stocks, rose 40.50 points to close at 9,374.20.

The technology-filled Nasdaq composite index gained 18.05 to 1,800.18. Standard & Poor's 500 index, a broader measure of market performance, increased 6.05 to 1,002.84.

Watchful Wall Street

"The stock market has already built in a lot of good economic news," Basu said. "Now the stock market is waiting for the ... more rapid growth to translate into better earnings."

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