WASHINGTON, 29 August 2003 — The US economy beat expectations in the second quarter, growing at a 3.1 percent annualized pace, the government said yesterday, revising upward an earlier 2.4 percent growth estimate. The rise in gross domestic product, the strongest since the second quarter of 2002, surprised economists, who had forecast a revision to about 2.9 percent growth.
A big factor was a 45.9 percent surge in defense spending, the strongest since the Korean War, as the government ramped up spending for the war in Iraq. The strong acceleration from the 1.4 percent growth rate in the first quarter suggests the world’s largest economy is gathering momentum and will show even stronger growth in the second half, said analysts.
“It’s really excellent. It’s a great platform for the building momentum of the next four quarters,” said David Littmann, chief economist at Comerica Bank, who said the rise is likely to continue in the coming quarters as a result of massive tax cuts and low interest rates. BMO economist Sal Guatieri said the figures along with other recent data point to growth of at least 4.5 percent in the July-September quarters. “When I say at least 4.5 percent there is an upward risk to that estimate,” he said.
“Upward revision in business investment is very encouraging. It suggests that businesses are now taking part in the economic recovery ... they are becoming increasingly confident in the economic outlook.”
A key figure watched by economists, known as final sales — the pace of economic activity minus inventory adjustments — increased 4.0 percent in the second quarter, compared with an increase of 2.3 percent in the first. Until now, experts say, the economy has been propped up by consumer spending, which has been boosted by cash from mortgage refinancing, but he said businesses now are beginning to invest more to meet strong demand.
“Inventories are at the rock-bottom level. Businesses were caught off-guard by stronger sales,” said Sung Won Sohn, chief economist at Wells Fargo Bank. “As sales improve, businesses will replenish inventories boosting economic growth and even employment. During the second quarter, the economy would have grown at an annual rate of 4.0 percent instead of 3.1 percent if the inventory runoffs were excluded.”
But independent economist Joel Naroff said he remains concerned by a lack of employment growth. “It appears the economy did quite fine in the spring and profits soared, so why isn’t anyone hiring?” he said. “Businesses are clearly getting their bottom lines back in shape and that is having a very positive impact on the economy, as can be seen by the improving investment situation. Now, if firms would only translate that into some confidence about the future and start hiring, we would really be off to the races.”
