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.
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.