U.S. Economic Growth Improves Over First Quarter

Gross Domestic Product
By Neil Irwin
Washington Post Staff Writer
Thursday, July 31, 2008; 12:39 PM

The U.S. economy grew at a solid pace in the second quarter, the government said today, despite being buffeted by a financial crisis, a deep housing slump, high fuel prices and a weak job market.

But the economy shrank at the end of last year, the Commerce Department said, and much of the recent improvement came from the one-time bump from economic stimulus payments, raising the prospect of weaker performance in the months ahead.

Gross domestic product rose at a 1.9 percent inflation-adjusted annual rate in the April through June period, the department said, far above what forecasters would have expected just a few months ago but below their more recent projections. It was boosted by strong exports resulting from the lower value of the dollar and rising consumer spending by Americans, who benefited from the stimulus checks.

That represents an improvement over the 0.9 percent growth rate of the first quarter and an economy that shrank 0.2 percent, according to the newly revised data, in the final months of 2007.

Other sources of strength were in the building of offices, hotels and other commercial construction, and spending by the government. GDP is the broadest measure of the economy's performance, measuring the total value of goods and services produced within U.S. borders.

The negative reading for the end of last year increases the chance that the current weakness in the economy will eventually be classified as a recession. The panel of economists that makes such judgments weighs several pieces of economic data, including GDP, in determining whether a "significant decline in economic activity spread across the economy, lasting more than a few months" has occurred.

The 1.9 percent annual pace of expansion is not far below what most economists believe to be the nation's long-term potential growth rate. It reflects a combination of the one-time boost of the stimulus payments that started arriving in May, and American consumers who have managed to keep consuming despite numerous headwinds. It also shows how other sectors have emerged to keep the economy growing despite the problems in the housing and financial industry that have deepened this year.

But economists caution that some of those positive forces, especially the stimulus checks, are likely to be fleeting, and many are forecasting weak numbers in the second half of the year.

Americans' personal consumption expenditures, which make up more than two-thirds of GDP, rose a steady 1.5 percent when adjusted for inflation, the highest rate since last summer. There is evidence that people were consuming more in March and April, even before the checks arrived, suggesting people either took on more debt or dipped into savings in order to keep making purchases amid higher food and energy prices and a weak labor market.

Investment in housing continued its rapid descent, falling another 15.6 percent. However, the rate of that fall is slowing, compared to a 25.1 percent drop in the first quarter. That offers economists some hope that the free-fall in home construction will bottom out later this year.

Foreign trade generated a strong addition to growth, with exports rising 9.2 percent and imports falling 6.6 percent. U.S. exporters have become more competitive in recent months because of the lower value of the dollar relative to other currencies.

The federal government's spending rose at a 6.7 percent annual pace, another contributor to growth.

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