Economy Grows on Impact of Stimulus

In May, Toni Quero planned to use her economic stimulus check to replace a window, but many people used the money to pay day-to-day expenses. Purchases of durable goods dropped 3 percent in the second quarter.
In May, Toni Quero planned to use her economic stimulus check to replace a window, but many people used the money to pay day-to-day expenses. Purchases of durable goods dropped 3 percent in the second quarter. (By Toby Talbot -- Associated Press)

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Gross Domestic Product
By Neil Irwin
Washington Post Staff Writer
Friday, August 1, 2008

The economy grew at a respectable pace this spring, despite the financial crisis, soaring fuel prices and moribund housing market. But as the impact of government stimulus payments fades and a boom in exports levels off, the economy is likely to face deepening challenges in the months ahead, economists said.

Consumers spent their economic stimulus checks and exporters shipped more goods abroad in the second quarter, according to a report from the Commerce Department yesterday, leading to a 1.9 percent annual growth rate in gross domestic product. That is not far below the nation's long-term growth potential.

The department said the economy shrank at the end of last year, revising an earlier estimate of growth. And there is evidence that the decent growth in the second quarter will come at a cost. "We essentially traded strong growth now for weak growth later," said Sung Won Sohn, an economist at California State University. "As a result, this may turn out to be a longer recession than we're used to."

The stock market fell 1.8 percent yesterday, a 206-point drop in the Dow Jones industrial average, after the GDP numbers came in below expectations and former Federal Reserve chairman Alan Greenspan said that he believes the housing market is nowhere near bottom.

Americans began receiving economic stimulus payments in May, and appear to have spent them to support their daily existence, not to purchase automobiles or furniture. Personal consumption rose at a 1.5 percent rate in the April through June period, driven by the purchases of day-to-day items and services; purchases of durable goods, which are expected to last three years or more, dropped 3 percent.

But with no comparable payments coming in the months ahead, Americans could be forced to buy less of all kinds of goods, economists said, particularly given a weak job market, tanking home values, and tight credit conditions that make it harder to borrow money.

The Labor Department will report on the job market this morning, and economists forecast that the jobless rate will have ticked up in July and that employers will have shed another 75,000 jobs. The number of new jobless claims rose to its highest level since 2003 last week, the department said yesterday, though the number was distorted by a one-time extension of employment benefits.

"Without the stimulus package, this would have been a very standard U-shaped recession," said David Wyss, chief economist at Standard & Poor's, who expects the economy to continue growing in the third quarter then contract at the end of the year and early 2009. "What the stimulus did was put a bump into the middle of it, turning a U into a W."

Another major driver of the solid second-quarter growth was trade. Exports rose at a 9.2 percent rate, and imports fell 6.6 percent. With the slump in the dollar, U.S. exporters have a new advantage over their competitors around the world.

But in recent weeks, the dollar has actually strengthened, which could mean that trade offers less of a bump in the months ahead. Moreover, the economies of Asia and Europe are now slowing, which could crimp demand for U.S. exports.

"Our trading partners are slowing down," Wyss said. "High oil prices are hitting Europe and Japan almost as much as they are here."

Another source of strength in recent months has been construction of office buildings, retail centers, hotels and the like. Investment in nonresidential structures rose 14.4 percent, according to the GDP report, a significant source of gains.

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