Economy grows at fast pace in quarter

GDP revision shows surprising strength

By Robert Gavin, Globe Staff, 8/29/2003

The US economy, driven by solid consumer, business, and government spending, grew in the second quarter at its fastest pace in nine months, underscoring mounting evidence of an accelerating recovery.

The Commerce Department yesterday reported that gross domestic product -- considered the broadest measure of economic activity, since it captures the value of all goods and services produced -- grew significantly faster from April to June than originally estimated. The department revised its initial estimate of second-quarter GDP growth to a 3.1 percent annual rate, up from the 2.4 percent rate reported at the end of last month.

Economic data are typically reported in preliminary form by the federal government and later revised as additional information is collected and analyzed.

Yesterday's upward revision illustrated the sharp turnaround the economy has made from the first quarter, when Iraq war worries weighed heavily on confidence and spending, and GDP grew at an anemic 1.4 percent annual rate. With inflation low and the Federal Reserve expected to keep fueling the economy with historically low short-term interest rates for the foreseeable future, economists said yesterday that they see a self-sustaining recovery in the making.

They noted GDP gains reported yesterday were broad-based, with consumers, who have borne the brunt of holding up the economy, finally getting some help from other sectors of the economy.

Take business, for example. Through most of the recovery, companies have been reluctant to spend, and economists have blamed that reluctance for the economy's anemic growth. But in the second quarter, business investment in software and equipment grew at an upwardly revised annual rate of 8.2 percent -- the fastest growth in three years

In addition, government purchases grew at an 8.2 percent rate, boosted by the fastest growth in defense spending in more than a half-century.

"Consumption's up; investment's up; capital spending is kicking in," said John Silvia, chief economist at Wachovia Corp. in Charlotte, N.C. "It's no longer an economy where growth is totally driven by consumers."

Still, economists added, the weak link of the recovery continues to be the job market, and until it, too, bounces back, the recovery will remain tenuous. Despite accelerating production, the economy has yet to reach the point where it is growing fast enough to create jobs -- a phenomenon that economists attribute to dramatic gains in productivity, and the transfer of jobs overseas, particularly in manufacturing.

Other data released yesterday indicated that the job market remains sluggish. The Labor Department reported that the number of people filing first-time claims for jobless benefits edged up to 394,000 last week from 391,000 the previous week. The Conference Board, a New York-based economic research group, reported that help-wanted advertising, a barometer of the job market, did not improve in July from June, remaining well below last year's level and near a four-decade low.

"We are at a point where growth is picking up, but will it become fast enough to generate hires?" said Bill Cheney, chief economist at John Hancock Financial Services Inc. in Boston. "I think so, but until it does, it's hard to be confident."

Most economists expect the economy to reach that point soon, with some projecting that growth in the second half of the year will exceed a 4 percent annual rate. Demand rebounded strongly in the second quarter to its best reading since 2000 -- growing at a 5 percent annual rate from 1.4 percent in the first quarter -- and consumers, flush with cash, thanks to federal tax cuts and home refinancing, should keep it strong.

At the same time, inventories have dipped, meaning that companies are likely to further expand production and hire workers to meet growing demand. But Silvia, the Wachovia economist, cautioned that even though the economy should soon begin to add jobs again, job growth is likely to be slower than in past recoveries.

"The economy has changed," he said." With globalization and productivity improvements, we have a business-cycle pickup, but we don't have the same pickup in jobs."

Robert Gavin can be reached at rgavin@globe.com.