GDP in 2Q grows at solid 3.4% rate

The Baltimore Sun

The nation's economy shook off its recent torpor to grow at a solid 3.4 percent annual pace in the second quarter, the government reported yesterday, as improving business investment and higher exports worked to offset a sharp slowdown in consumer spending.

The Commerce Department's report on gross domestic product modestly topped the 3.2 percent most economists had been expecting, and it was also the best performance since the first quarter of 2006, when the economy was riding the final months of the boom in the housing industry.

Yesterday's report was welcome news, and marked a substantial improvement over the dismal 0.6 percent growth of the first quarter. But enthusiasm was muted, because no one expects the economy to sustain the growth over the rest of the year. Experts expect second-half growth will be below 3 percent, with the more pessimistic suggesting that growth might possibly even fall short of 2 percent.

'A temporary event'

"The impressive pickup in economic growth in the second quarter is a temporary event," said Northern Trust economist Asha Bangalore.

Despite the improvement in the second quarter, the economy is "on a clearly weakening trend," said Merrill Lynch economist David Rosenberg.

GDP, which measures the total production and consumption of goods and services in the U.S., is considered the most comprehensive snapshot of the nation's economic health.

The latest quarter got some help from higher exports and a big upturn in government defense spending, neither of which does much for the economy's fundamental, long-term prospects.

In contrast, the most prominent, and most potentially troubling, trend was the major deceleration in consumer spending, which had remained strong even as the economy lost momentum over the past year.

Consumer spending grew just 1.3 percent in the second quarter, a worrisome decline from the first quarter's 3.7 percent and the 3.4 percent growth during 2006.

Higher gasoline costs are cutting into Americans' disposable income. In addition, since the housing sector went into its nose-dive, consumers can no longer tap the growing equity in their homes through refinancing as they once did.

The elimination of that "equity withdrawal," which generated huge amounts of spendable cash for Americans in recent years, "is the main reason for the weakness in consumer spending," said Northern Trust's Bangalore, "and there's little reason to believe this will change in the second half of 2007."

'Major wild card'

At present, "the major wild card remains the housing market and its impact on the broader economy," said Economy.com's Augustine Faucher.

Faucher thinks the latest GDP figures indicate that "the economy appears to be coming back from its recent lull," and he thinks GDP will grow at something below 3 percent in the second half. But, he cautions, if the housing contraction doesn't stabilize in coming months, as he expects, "the expansion could unwind."

The latest report showed that U.S. companies substantially boosted their spending on buildings in the second quarter. But their economically more important capital spending to purchase computers, machinery and other equipment used to produce goods was fairly soft.

Capital spending rose a lackluster 2.3 percent in the second quarter, a performance that looks good only in comparison to the anemic 0.3 percent growth in the first quarter or the decline of 4.9 percent in the last quarter of 2006.

Capital outlays were "on the weak side," said Merrill Lynch's Rosenberg, and despite the higher-than-expected GDP reading, "we still believe that the weak handoff into the third quarter remains intact."

James P. Miller writes for the Chicago Tribune.

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