Economy grew at better-than-expected 3.3 percent rate

Friday, September 26th 2003, 12:00 am
By: News On 6

WASHINGTON (AP) _ The U.S. economy grew at a better-than-expected 3.3 percent annual rate in the second quarter, the government reported Friday, raising hopes the country is finally on the verge of mounting a sustained rebound from the 2001 recession.

The increase in the gross domestic product _ the country's total output of goods and services _ for the April-June period was revised upward from a 3.1 percent estimate made a month ago, reflecting newfound strength in such areas as housing construction, which has been booming this year.

The 3.3 percent GDP growth rate was better than expected with most economists thinking the spring GDP figure would show no change from last month's 3.1 percent preliminary estimate, which had been an upward revision from the much weaker initial estimate of 2.4 percent made two months ago.

In a sign of the lingering effects of the country's hard times, the government also reported Friday that after-tax corporate profits dropped by 5 percent in the second quarter, the worst quarterly showing since a 6.5 percent decline in the fourth quarter of 2001.

The GDP grew at an anemic rate of 1.4 percent in both the fourth quarter of last year and the first three months of this year after a 4 percent growth rate in the third quarter of 2002, a pace which had raised false hopes that the economy was beginning to mount a sustained rebound last year.

However, analysts believe this year's rebound may turn out to be the real thing with growth expected to strengthen significantly in the current quarter and the final three months of this year. The growth likely will be spurred by continued low interest rates from the Federal Reserve and a third round of tax cuts, which President Bush pushed through Congress earlier this year, economists have said.

The most optimistic economists believe that growth in the current July-September quarter could top 5 percent, reflecting strong consumer spending powered by the tax cuts which took effect in July. They are forecasting that growth will remain strong in the final three months of this year, as well, at a rate well above 4 percent.

If that forecast comes true, it would be the strongest back-to-back quarters of GDP growth since the last two quarters of 1999 during the boom years of the 1990s when the country was in the midst of the longest economic expansion in its history.

Since then, however, the United States has endured rough times that began with the bursting of the stock market bubble in the spring of 2000 and continued with a recession starting in March 2001. Then came the Sept. 11 terrorist attacks and a string of corporate accounting scandals.

While the country has officially been out of recession since November 2001, it has yet to mount a sustained rebound that has been strong enough to prompt companies to begin rehiring laid-off workers. More than 3 million payroll jobs have been lost since the start of the recession and a half-million of those job losses have occurred just this year.

But economists said the new round of government stimulus from the tax cuts and increased military spending coupled with the Fed's low interest rates should be enough to get the economy out of its funk.

Federal Reserve Chairman Alan Greenspan and other Fed officials have made it clear that they intend to leave a key short-term rate they control at low levels for a considerable period of time. The thinking here is that inflation not only has remained dormant, but also has fallen to such a low level that there are some concerns that an unexpected shock could trigger a destabilizing bout of deflation.

Deflation would consist of a sustained fall in prices, something the country hasn't seen since the Great Depression.

An inflation gauge tied to the GDP, the implicit price deflator, rose at an annual rate of just 1 percent in the second quarter, down from a 2.4 percent rate in the first quarter.

Among the various components, spending on home construction shot up at a 6.6 percent annual rate in the second quarter, even better than the 4.5 percent gain reported a month ago.

Consumer spending rose at a 3.8 percent rate in the second quarter. While the overall figure was unchanged from a month ago, the government revised upward the increase in spending on durable goods such as cars to a sizzling 24.3 percent pace. But spending on nondurable goods, items not expected to last three years, was revised down slightly.

Spending on national defense, propelled by the war in Iraq, rose at a 45.8 percent annual rate, only slightly changed from last month's estimate of a 45.9 percent rate of increase.