- The Washington Times - Friday, August 27, 2004

On the eve of the Republican National Convention, the Commerce Department ratcheted down the already-disappointing economic growth rate for the second quarter. The annualized growth rate for the April-June period was lowered on Friday from the previously reported 3 percent to 2.8 percent. The change was largely due to huge adjustments in the foreign-trade statistics.

The trade report for June, which was issued after the government released its advanced estimate of the second-quarter growth rate for GDP, revealed that the trade deficit soared by nearly 20 percent in a single month to a record level of $55.8 billion. Previous monthly trade-deficit records had already been set in January, February, March and April. June’s massive trade deficit represents about 5.75 percent of GDP, a level that is almost certainly not sustainable.

As a result of June’s trade figures, the growth rate of second-quarter exports was revised significantly downward from 13.2 percent to 6.1 percent. Meanwhile, the growth rate of imports, in part reflecting rising oil prices, was revised upward from 8.7 percent to 14.1 percent. The net effect of the trade revisions was to shave nearly 1.4 percentage points from the quarter’s overall growth rate. That compared to the initial estimate of a drag of less than one-tenth of a percentage point resulting from the deteriorating trade position.

Interestingly, the effects of the huge revisions in the foreign-trade sector overwhelmed a couple of welcome positive revisions. The growth rate of personal consumption expenditures, which account for 70 percent of GDP, was revised upward from 1 percent to 1.6 percent. The increase in business investment, which was initially reported to be nearly 9 percent, was bumped up to more than 12 percent. After declining for nine consecutive quarters following the collapse of the Clinton-era telecom bubble, business investment has now risen at double-digit annual rates during four of the last five quarters.

The U.S. slowdown arrives just as Japan’s annual growth rate also sharply decelerated to 1.7 percent in the second quarter following 6 percent growth rates achieved during the previous two quarters. Meanwhile, the eurozone, where the German and Italian economies are performing badly, grew by only 2.3 percent during the first half of the year. And the soaring Chinese economy appears headed for a noticeable deceleration, which would complicate the expansions of its neighbors, whose exports to China have been the driving force. With oil prices likely to remain well above the prices that prevailed during the early stage of the U.S. economic recovery, when they averaged about $20 per barrel compared to about $45 today, the world economy could be entering a dicey period.

The economic slowdown confirmed in Friday’s report will not be welcomed at the Republican convention. The president needs some good economic news. At 8:30 a.m. next Friday, less than 10 hours after President Bush will accept the nomination for a second term, the Labor Department will be issuing a crucial economic report, which will detail the August employment situation. After lousy reports for June and July, a turnaround in the employment situation would be most welcome at the White House.

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