U.S. economy jumps in second quarter

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By David M. Dickson

The U.S. economy grew at a surprisingly vigorous 3.3 percent pace in the second quarter, much faster than first reported, the Commerce Department said Thursday.

But analysts expect growth to falter during the current quarter and turn negative by the end of the year as the effect of the tax rebates wears off and export markets start to shrink, threatening to tip the U.S. economy into recession as voters go to the polls in November.

Gross domestic product (GDP) during the April-June period increased much faster than the 1.9 percent rate the government reported last month. The upward revision was much larger than economists expected.

It was "a surprisingly good outcome for a quarter in which industrial production, employment and hours worked were falling and the unemployment rate was rising," said Nigel Gault, chief U.S. economist for Global Insight.

But the upbeat report is "kind of the last hurrah" for the U.S. economy, said Martin Regalia, vice president for economic policy at the U.S. Chamber of Commerce. Despite the big number, the U.S. economy appears to be "slipping into a good old-fashioned recession," he said.

Pointing to the ongoing problems in housing, the tightening in the credit markets and the effect of higher oil prices, Mr. Regalia said he would not be surprised to see negative growth during the fourth quarter of this year and the first quarter of 2009.

"We expect GDP growth to slow in the third quarter to around 1.5 percent, but then to dip to zero or below in the fourth as the credit crunch bites harder," said Mr. Gault.

Private economists weren't the only ones pessimistic about the state of the economy. The Federal Reserve's economic forecast for its Aug. 5 meeting reported that "the labor market continued to weaken significantly, financial conditions remained unfavorable, consumer and business confidence was downbeat and manufacturing activity was contracting."

Trade accounted for more than 90 percent of economic growth in the second quarter. The export sector continued to sizzle, increasing at an annual rate of 13.2 percent and helping the U.S. trade deficit shrink to its smallest level in eight years.

The U.S. economy may not be able to count on robust export sales in the future, however. The dollar, whose six years of decline helped to ignite the export boom, has recently reversed course and regained some ground. With the economies of Japan and Germany already in decline during the second quarter, "the outlook for exports is less optimistic," said Mr. Gault of Global Insight.

Corporate profits, meanwhile, came in 7 percent below last year's levels, registering their worst performance since the third quarter of 2001 when the economy was near the bottom of its last recession.

Personal spending grew 1.7 percent during the second quarter, significantly faster than during the two previous quarters. However, for the first time since the 1990-91 recession, consumers reduced their spending on durable goods - the so-called big-ticket items such as cars and appliances - for two consecutive quarters.

"Consumer spending was given a big bounce from the stimulus package tax rebate checks, especially during May and to a lesser extent in June," said Peter Morici, a business professor at the University of Maryland. "However, the effects of that stimulus package have now worn off and consumer activity is slowing."

As housing prices continue to decline, households will feel less wealthy and wallets will begin to tighten. Spending on home construction fell 15.7 percent in the latest quarter - its 10th consecutive quarterly decline. Meanwhile, housing starts and housing permits continued to fall in July, indicating the bottom in home construction has yet to be reached.

"Since consumer spending is slowing down and the credit crunch is tightening its grip, it is hard to foresee another quarter with such a robust GDP headline for some time," Mr. Gault concluded.