Economy Grows at 5.2 Percent Rate

Friday, July 28th 2000, 12:00 am
By: News On 6

WASHINGTON (AP) — The remarkable U.S. economy, once again confounding the experts, grew at a robust annual rate of 5.2 percent in the spring, as a surge in investment by American businesses offset a slowdown in consumer spending.

The Commerce Department said Friday that the increase in the gross domestic product — the broadest measure of economic health — in the just-completed April-June quarter surpassed growth in the first quarter, when the economy was growing at a 4.8 percent annual rate.

The acceleration in activity in the second quarter came as a surprise to economists, who had widely forecast that the economy had slowed in the spring under the impact of a series of interest rate increases by the Federal Reserve.

The spring slowdown has now been erased and economic data released this week indicate that the current third quarter is starting at a strong pace as well.

``We essentially have a very strong economy. Business investment is just roaring,'' said Asha Bangalore, an economist at Northern Trust Co. in Chicago.

She noted that in addition to the strong GDP report, the government released data on Thursday showing that new orders for big-ticket manufactured goods surged by 10 percent in June while Americans' wages and benefits rose over the past 12 months at the fastest pace in nine years.

All of these factors, unless they are mitigated by signs of slowing in the next few weeks, will force the Fed to boost interest rates for a seventh time at its next meeting on Aug. 22 to keep inflation in check, she predicted.

However, all the economic strength so far has not triggered inflation pressures, according to price measures tied to the GDP. A GDP price gauge favored by Fed Chairman Alan Greenspan rose at an annual rate of just 2.3 percent in the second quarter, down from a first quarter rate of 3.5 percent.

Before Friday's release, economists had been estimating that GDP growth slowed to around 3.7 percent in the second quarter, reflecting the view that American consumers were pausing to catch their breath after a big jump in activity in the first quarter.

Consumer spending did slow, rising at an annual rate of just 3 percent in the second quarter, compared to a 7.6 percent surge in the first quarter, which had been the biggest jump in 17 years.

But the consumer slowdown was offset by a jump in private investment, including business spending on equipment and inventories, which rose at a whopping annual rate of 21.2 percent in the second quarter. That compared with a 5.1 percent gain in the first quarter.

This surge reflected heavy spending by businesses on computers, software programs and industrial machinery, which was rising at an annual rate of 21 percent. Businesses also built up inventories more in the second quarter than they had in the first three months of the year.

Economists' efforts to predict quarterly movements in GDP were complicated this month by the government's annual revisions of past data. Those revisions left the annual GDP increase at 4.2 percent in 1999 but revised upward the gains in 1998, from 4.3 percent to 4.4 percent, and in 1997, from 4.2 percent to 4.4 percent.

The quarterly movements were also revised, with the fourth quarter of 1999 now shown as increasing at an astonishing 8.3 percent pace, the strongest since a 9 percent surge in the second quarter of 1984.

Because of the upward revision to the fourth quarter, the first-quarter GDP rate was revised down slightly to 4.8 percent, instead of the previously reported 5.5 percent.

The strength in the second quarter occurred despite the fact that America's trade deficit widened and acted as more of a drag on growth. The deficit subtracted 1.5 percentage points from growth in the second quarter, compared to a reduction of 0.9 percentage points in the first quarter.


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