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. (By Toby Talbot -- Associated Press)

But that likely reflects work on projects set in motion months or even years ago. More recently, banks and other lenders have been far more reluctant to make money available for commercial building projects, potentially leading to that sector being a drag on growth in the coming year.

An index of activity at architecture firms, which is an indicator of what is to come in the construction sector, has been at levels indicating contraction for five straight months, according to the American Institute of Architects.

"I've been expecting commercial construction to slow just because credit conditions have tightened so much," said Alan D. Levenson, chief economist at T. Rowe Price.

Ironically, one of the few reasons for optimism in the GDP report is in the generally poor housing market. Residential investment was a drag on growth, falling at a 15.6 percent annual rate. But that is a slower pace of decline than in recent quarters. Investment in housing fell 25.1 percent in the first three months of the year.

If that trend continues and investment in new homes bottoms out in the coming months, it would eliminate one continuing source of drag on the overall economy.

The Bush administration cited the solid GDP number as a vindication of the stimulus package passed in February, and suggested that the economy is on more solid footing than many Democrats and independent economists argue.

"I want to remind you a few months ago there were predictions that the economy would shrink this quarter, not grow," President Bush said in remarks in White Sulphur Springs, W.Va. "As a matter of fact, it's more than double the rate we saw in the first quarter. That's positive."

Democrats said that the modest growth number shows the need for further government stimulus. "When a $100 plus billion stimulus program creates such paltry growth, it isn't a time for the White House or Congress to just sit back and relax," said Charles E. Schumer (D-N.Y.), chairman of the Joint Economic Committee.