2Q GDP Buoyed by Exports and Rebate Checks

By Jason Simpkins
Associate Editor

U.S. economic growth accelerated in the second quarter, propelled by consumer spending and strong exports, but previous gross domestic product (GDP) estimates were revised down, indicating a soft economy that could easily sink once government stimulus checks wear thin.  

The economy grew at a 1.9% annual rate in the second quarter, a sharp improvement over the first quarter's 0.9% pace. The increase was in large part buoyed by a shrinking trade deficit. U.S. exports rose 9.2% for the quarter, while imports decreased 6.6%. The trade gap narrowed to a $395.2 annual pace as a result, the smallest trade deficit in seven years.

The difference in trade added 2.4 percentage points to growth, the most since 1980, according to Bloomberg data. Excluding trade, the economy would have contracted at a 0.5% pace.

Consumer spending, which accounts for about 70% of GDP, was also strong, rising 1.5% in the April-June period after a 0.9% jump in the first quarter.

Both increases were fueled by the issuance of the $112.4 billion in stimulus payments sent out this year. According to the U.S. Treasury Department, those payments have injected $91 billion into the U.S. economy so far, but analysts are beginning to wonder just how much longer their effect will linger.

Initial jobless claims rose a seasonally adjusted 44,000 to 448,000 last week - the highest total for weekly jobless claims since April 2003. That rise sent the four-week moving average of new jobless claims, a less volatile indicator, up 11,000 to 393,000. The government's employment report for the month of July, scheduled for release today (Friday), is expected to extend the losses even further.

Inflation appeared to lose some of its bite as the price index increased by just 1.1%, down from 2.6% in the first quarter. However, the U.S. Federal Reserve's preferred gauge of inflation rose at a 2.1% pace, down only modestly from 2.3% in the first quarter.

Gains in wages and salaries were also modest. Wages and salaries grew 0.7%, and benefit costs advanced 0.6%. While that may be good news for central bankers, it comes at the expense of consumer spending.

"Both wage and salary growth and benefit growth have been decelerating in recent quarters after reaching fairly modest cyclical peak in late 2006/early 2007 because of the loosening in the labor markets," Insight Economics analyst Steven Wood told the Wall Street Journal. "Further deceleration is likely as the labor markets continue to weaken."

American workers also earned less last year than the government  originally estimated. Employee compensation was reduced by $69 billion, or 0.9%, in 2007.

GDP growth was scaled back as well, as nine of the 13 quarters under review were revised down. That includes the fourth quarter of 2007, during which the economy contracted 0.2%. First-quarter growth was revised down from 1% to 0.9%.

The growth estimate for 2005 was cut to 2.9% from 3.1% and the 2006 expansion was revised down to 2.8% from 2.9%.

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