- The Washington Times - Thursday, July 31, 2003

Economic growth accelerated to a 2.4 percent pace this spring, boosted by the biggest increase in defense spending in a half-century and a revival of consumer and business spending. Accompanied by signs that joblessness is on the decline, yesterday’s report on growth from the Commerce Department provided solid evidence that a strong economic recovery is taking hold. The gross domestic product had grown by an average 1.4 percent in the previous half-year, but jumped last quarter as defense spending skyrocketed by 44 percent with the start of the war in Iraq. That spending marked the biggest quarterly defense buildup since the Korean War in 1951. Consumers added to the buying spree with cars, furniture and other big-ticket goods, increasing their pace of spending to 3.3 percent. That caused businesses to draw down inventories to bare-bones levels that will force them to replenish their stocks, further bolstering growth in the second half of the year, economists said. But perhaps the most telling sign of life was a 6.9 percent rebound in business-investment spending — which had been the weakest area of the economy. Spending on computers and software raced ahead at double-digit rates not seen since the 2000 technology boom. “The economy is turning the corner,” said BMO Financial Group economist Sal Guatieri. Stocks initially surged on the report, with the Dow Jones Industrial Average gaining more than 150 points before settling back to a 33-point gain by the end of the day. The dollar posted solid gains against most currencies as investors around the globe braced for faster growth in the world’s largest economy. “We need lots more of this, but it’s a good start,” said economist Philippa Dunne, noting the long-awaited return of business spending, which had been “missing in action” for years. The Bush administration took heart from the news after two years of efforts to promote growth through increased spending, tax cuts and dramatic interest-rate cuts. “I was very encouraged,” said Treasury Secretary John W. Snow. While the 2.4 percent growth rate is still not adequate, he said that “clearly, the economy is turning and the recovery is now well under way. And we haven’t even yet seen the full effect of the tax bill.” Mr. Snow predicted the economy will accelerate even further to a 3 percent growth rate in the second half of the year, influenced by President Bush’s $350 billion in tax cuts, and will start to create jobs again. Some private forecasters agree. Mr. Snow, appearing on Capitol Hill, said a separate report from the Labor Department yesterday showed a second weekly decline in jobless claims to 388,000 last week — a level that suggests the job market is stabilizing and may be poised for growth. “There is a direct relation between growth and job creation,” he said. “When companies come back and spend more capital, as the report indicated, they need workers to work those machines. You’ll see unemployment come down below the current level of 6.4 percent.” Edward Yardeni, chief investment strategist with Prudential Securities, said the surge in demand in the last quarter was the largest since the 2000 economic boom. Growth was impaired mainly by the decline in inventories and a flood of imports. Mr. Bush’s tax cuts, most of which went into effect last month, should “feed the momentum” seen in yesterday’s report, he said. “Look for a further acceleration of consumer spending in the second half as tax cuts boost disposable income.” John Park, economist with Kudlow & Co., said that growth appears to be taking off not only because of the extraordinary stimulus put in place by Washington, but because major roadblocks have been removed. “Now the economy is starting to fire on all cylinders,” Mr. Park said, noting that “an end to the Iraq war has significantly reduced obstacles to recovery.” Many other obstacles besides the war have dissipated in recent months, economists note, including high energy prices, terrorist attacks, the turmoil of corporate scandals and the fall of the stock market. One of the only negative developments in the last month has been a steep rise in long-term interest rates, largely the result of burgeoning budget deficits and the increasing evidence that growth is picking up. The sharp rise in interest rates has cut short a historic refinancing wave that had been buoying consumer spending. “The recent, steep backup in yields won’t derail the recovery,” said Richard Berner, chief economist of Morgan Stanley. “The passage of time and corporate discipline have begun to correct the major excesses of the 1990s,” and the higher rates are being offset by a significantly improved stock market and the tax cuts, he said.

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