Defense Spending Driving U.S. Economy
Thu July 31, 2003 10:23 AM ET
By Glenn Somerville
WASHINGTON (Reuters) - The biggest surge in defense
spending since the Korean War era helped drive U.S.
economic growth ahead at a surprisingly brisk 2.4
percent annual clip in the second quarter, the
Commerce Department said on Thursday.
The pickup in gross domestic product, or GDP, coupled
with a separate report showing a further decline in
new claims for unemployment benefits last week,
electrified financial markets as hopes grew that a
second-half revival was at hand.
The unexpectedly strong advance in GDP followed anemic
annual growth rates of 1.4 percent in each of the two
prior quarters. The second-quarter figures handily
surpassed Wall Street economists' forecasts for a 1.5
percent second-quarter expansion.
Separately, the Labor Department said the number of
new claims for unemployment benefits fell last week by
3,000 to a revised 388,000 -- the third straight
weekly decline and well below the psychologically
important 400,000 level.
Analysts said the data point to a fairly broad-based
economic strengthening, especially heartening with
Bush administration tax cuts forecast to add more
juice ahead.
"It's a positive indication that the economy is
recovering and that it was improving at a somewhat
faster rate than initially expected during the second
quarter, and that it would be likely that the rate of
improvement would increase going forward as the tax
cuts begin to hit," said Joe Stocke, a managing
director of Stoneridge Investment Partners LLC.
BRIGHTENS HOPES
Second-quarter GDP growth was the strongest since a 4
percent rate of increase in the third quarter last
year.
"Growth in the second quarter was boosted by federal
defense spending, by business investment in plant and
equipment, and by consumer spending," Commerce noted.
Spending on defense, much of it to support the war in
Iraq, shot up at a 44.1 percent rate -- the strongest
since 110 percent in the third quarter of 1951 --
after falling 3.3 percent in the first three months of
the year.
Economist James Glassman of J.P. Morgan Chase in New
York said both GDP and lower jobless claims were
"quite promising" in the sense of implying that
consumers and businesses saw better times ahead, even
if growth is still below what is needed to reduce the
unemployment rate.
"On GDP the trend is not impressive and no one was
expecting it to be impressive but the composition of
growth is, and it just reinforces the optimism about a
second-half pickup," Glassman said.
The dollar's value climbed against other major
currencies after the GDP data, in the apparent belief
a U.S. economic rebound will outstrip those in other
major regions and make U.S. investments relatively
more attractive.
On Wall Street, stock prices bounded higher on the
positive economic news, while bond prices tumbled in
expectation investors would find equities a better bet
for future gains.
Business investment, which has lagged during the slow
expansion from the 2001 recession, showed definite
signs of revival in the spring quarter.
Nonresidential spending -- the broadest category of
investment -- rose at a 6.9 percent annual rate in the
second quarter after decreasing 4.4 percent in the
first three months.
Consumer spending, which fuels two-thirds of national
economic activity, added to the second-quarter pace of
expansion. Spending, especially on new cars and other
costly durable goods, climbed to a 3.3 percent rate
from 2 percent in the first three months of the year
and was the strongest since a 4.2 percent increase in
the third quarter of last year.
CHEAP CREDIT HELPS
The Federal Reserve, which has cut U.S. short-term
interest rates to 45-year lows in a bid to spark a
stronger recovery, said on Wednesday it saw signs in
June and early July that a more vigorous pace of
growth was budding as manufacturing activity grew.
"Several districts noted increased optimism about
economic prospects in coming months," the U.S. central
bank said, adding it saw "nascent signs of a recovery"
among manufacturers, which have shed an estimated 2.6
million jobs since mid-2000.
Businesses reduced inventories at a .9 billion
annual rate in the second quarter after building them
up at rates of .8 billion in the first quarter and
.8 billion in the final three months last year.
Slimmed-down inventories generally are considered
promising for the future, since it means companies
must quickly ramp up production and potentially hire
more employees once stronger demand is firmly
established.