- The Washington Times - Thursday, August 28, 2003

Revealing that the economy’s unexpected momentum last quarter was even stronger than initially reported, the Commerce Department announced yesterday that the second quarter’s annual growth rate was 3.1 percent. That represents an upward revision from the 2.4 percent growth rate reported last month. Even more important, yesterday’s “preliminary” report on second-quarter gross domestic product (GDP), which updated July’s “advance” report, revised upward the growth rate of final sales from 3.2 percent to 4 percent. Final sales reflect GDP less changes in private inventories.

The 3.1 percent growth rate significantly exceeded the expectations of most economists, who anticipated about the same 1.4 percent growth rate of the previous six months. Nothwithstanding the disproportionate contribution from war-related spending, other sectors still managed to generate welcome improvement. Business investment, which declined during nine of the previous 10 quarters, grew at a robust annual rate of 8 percent last quarter. Spending on business structures increased by 7.1 percent, after declining at an average annual rate of 16 percent during the previous six quarters. Business spending on equipment and software increased by more than 8 percent after declining by more than 5 percent during the first quarter.

Consumers, whose spending accounted for 70 percent of GDP last quarter, appeared to re-energize themselves. Following an average growth rate of less than 1.9 percent for the previous six months, consumer spending reached a solid 3.8 percent. Spending on durable goods skyrocketed by 24 percent. The foreign sector subtracted 1.2 percentage points from second-quarter growth as exports fell for the third consecutive quarter and some of the increases in consumption and business investment were channeled into imports.

One important downward revision that no doubt caught the attention of Alan Greenspan related to the core price index for personal consumption expenditures (PCE). The core index excludes the frequently volatile changes in food and energy prices. Compared to the July report, yesterday’s GDP report reduced the annual growth rate of the core PCE price index for the second quarter from 1.2 percent to 0.9 percent. That follows a first-quarter increase of 0.8 percent. The downward revision confirms the intensification of disinflationary pressures. Not since 1940, the last year the core PCE index increased by less than 1 percent, have disinflationary pressures been so strong.

A further acceleration of economic growth would likely reduce these potentially debilitating disinflationary pressures. If left unchecked, they might evolve into outright deflation. That must be prevented, which makes it imperative that the recent spate of upwardly revised growth forecasts for the next six quarters comes to fruition.

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