- The Washington Times - Thursday, August 28, 2003

The economy attained a 3.1 percent growth rate this spring without adding new workers — a surprisingly good performance that suggests an economic boom is under way.

Signs of stability also emerged in the job market yesterday, raising hopes that layoffs are on the wane and businesses are poised to start hiring again. New claims for unemployment benefits ticked up by 3,000 last week, the Labor Department reported, but remained just under the 400,000 threshold, suggesting that labor conditions remain stable.

Yesterday’s Commerce Department report showing that growth more than doubled between the first and second quarters adds to a string of strong economic reports in recent weeks. The trend has convinced many investors and businesses that a major acceleration in growth is occurring in the second half of the year.

Only a month ago, the department had estimated the spring growth rate at 2.4 percent. Evidence since then of stronger spending by consumers, businesses and the Pentagon, combined with a better trade performance, substantially boosted the figure.

The Commerce Department report showed an 8.2 percent surge in business spending on computers and software — the biggest increase since the technology boom of 2000. The growth spurt flooded business coffers with $78 billion in cash and lifted profits by 11 percent during the quarter. That has left companies in a better condition to spend and hire in the months ahead.

“Momentum is building for faster economic growth,” said Jerry Jasinowski, president of the National Association of Manufacturers, noting that businesses have not been this flush with cash since the 2001 recession.

The report spawned optimism that the economy is headed for a boom because the surge in growth came even before consumers and businesses saw sizable increases in their disposable incomes as a result of $350 billion in federal tax cuts that went into effect last month.

Since some $60 billion in tax rebates were mailed out in July, major department stores like Wal-Mart and Sears have reported significant increases in sales and are raising their forecasts for growth in the months ahead.

“Given the tax cut,” said Mr. Jasinowski, “economic growth for 2003 overall will likely be in excess of 3 percent.” For the second half of the year, many economists are projecting growth of between 4 percent and 6 percent.

Such growth seemed unlikely just a few months ago, when the economy was in a directionless muddle, and pessimism among businesses and consumers was pervasive, fed in part by uncertainties raised by the war in Iraq.

Businesses were surprised by the uptick in growth, which started in April after coalition forces took control of Baghdad. They responded by drawing down inventories, stretching resources and pushing workers harder to meet the unexpectedly strong demand. The result was a 5.7 percent gain in productivity during the quarter that helped them to rake in profits.

Andy Bryant, chief financial officer of technology bellwether Intel Corp., admits to being caught off guard. He said in a conference call with investors last week that sales of Intel processors have been unexpectedly strong. As a result, he predicted that sales in the current quarter should be up by as much as 20 percent.

“The economic tide is rising a little bit,” he said.

But economists caution that robust growth cannot continue unless businesses start hiring again. In normal economic times, growth in jobs and incomes enables consumers to spend more, which in turn enables businesses to produce more and boost hiring in a self-sustaining cycle of expansion.

Bill Cheney, chief economist with John Hancock Financial Services, said that growth during the second quarter, while healthy, was attained entirely through productivity gains and was not strong enough to prevent job losses. After two months of even stronger growth, he said, “we still aren’t seeing much evidence that the jobs picture is brightening.”

Employers last quarter reached a high-water mark in productivity for the year, but their ability to keep producing more without adding workers has been in evidence for some time. Since the end of the 2001 recession, the nation has experienced steady economic growth despite the loss of more than 1 million jobs.

Both the Federal Reserve and the Bush administration are betting that the robust demand and growth rates will force businesses to start hiring. But “until we get some serious job growth,” Mr. Cheney said, “nobody can relax about the outlook.”

Shreds of evidence emerged yesterday that the job market is stabilizing. Besides the relatively minor rise in jobless claims, a measure of help-wanted advertising published by the Conference Board was flat for a second month after having plunged to a 42-year low in May.

“The labor market may finally be hitting bottom,” said Ken Goldstein, an economist with the business research group. “Job-advertising volume has stopped declining, although it remains at very low levels,” he said, and “while layoffs remain large, they are no longer intensifying.”

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