U.S. Economy Surges in the Second Quarter, Struggles After That

By Jason Simpkins
Staff Writer

The U.S. economy made a strong showing in the second quarter, with growth surging at an annual rate of 3.8% — a major improvement over the anemic 0.6% advance of the first quarter, according to The Associated Press. It was the strongest quarterly showing in more than a year, the U.S. Commerce Department reported yesterday (Thursday).

U.S. corporate profits helped fuel that economic improvement in the second quarter, with companies reporting that their bottom lines expanded at a 5.2% clip – more than three times the 1.5% rate of the first quarter. Third-quarter earnings season will be under way in the next several weeks.

The outlook ahead isn’t nearly so upbeat, however.

The National Association for Business Economics believes growth in the third quarter decelerated to a 2.4% pace in the third quarter and predicts that economic growth will remain relatively flat in the year’s final quarter, advancing at a 2.5% clip.

However, other analysts believe that the weight of the slumping U.S. housing market – and the accompanying credit crunch that has spread worldwide – will cause growth to slow much more significantly. Indeed, many economists anticipate that the housing downturn won’t reverse itself until well into 2008.

The Commerce Department said yesterday that new home sales fell 8.3% in August. The decline drove sales down to a seasonally adjusted annual rate of 795,000 units, the lowest rate in seven years. The median price of a home dropped 7.5% from a year ago. The number of homes for sale at the end of the month fell 1.5%, to 529,000. However, the inventory of unsold homes is up 8.2% at the current sales pace. The number of properties completed and waiting to be sold also rose by 2,000 to 180,000.

The worst housing slump since 1991 has taken a harsh toll on economic development. Higher interest rates have squeezed homeowners and defaults particularly in the subprime market have spiked dramatically.

Some good news breached the labor front as the Labor Department reported a drop in the number of new applicants for jobless benefits. The department said that new applications for jobless benefits dropped by 15,000 to 298,000 last week. Some analysts had predicted that the number of applicants would swing in the other direction, rising by as many as 7,000.