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GDP Revised Up, Spending Strong

September 26, 2003
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WASHINGTON (Reuters) - Healthy consumer spending nudged U.S. economic growth ahead at a slightly faster second-quarter pace than previously thought, the Commerce Department said on Friday, setting the stage for a second-half surge in growth.

Gross domestic product, or GDP, grew at a revised 3.3 percent annual rate in the three months from April to June, up from a 3.1 percent rate reported a month ago that Wall Street economists had expected to be unchanged.

The second-quarter pace of expansion was more than double the 1.4 percent posted in each of the two preceding quarters and was the strongest since a 4 percent advance in the third quarter last year.

Many forecasters anticipate GDP growth is set to accelerate to rates of four percent or higher in the third and fourth quarters, supported by a buoyant housing market and by lean inventories that imply businesses have more incentive to make new investments.

Exceptionally robust defense spending -- up 45.8 percent in the second quarter for the strongest quarterly growth since 1951 in the Korean War era -- added impetus to growth in the spring and may last for some time as U.S. involvement in Iraq and elsewhere continues.

Consumer spending increased at a 3.8 percent annual rate in the second quarter, nearly double the first quarter's 2 percent -- significant since spending by consumers on goods and services fuels two-thirds of national economic activity.

Analysts said the upwardly revised GDP report buttressed predictions for a continuing pickup in activity.

"This is again very positive and it suggests there's good forward momentum in the economy," said economist John Silvia of Wachovia Securities in Charlotte, N.C.

Silvia added that good growth and low inflation suggested no need for the U.S. Federal Reserve to raise interest rates before next year -- further undergirding the pace of expansion.

The dollar strengthened after the report on GDP -- a gauge of total goods and services produced within U.S. borders -- in the apparent belief the U.S. economy will continue to outperform Europe and Japan.

The report contained one sour note, as Commerce reported corporate profits after taxes shrank 5.0 percent in the second quarter, deeper than the 3.4 percent drop reported a month ago and a contrast with the first quarter's 3.8 percent rise.

Non-residential investment, generally taken as a measure of businesses' willingness to expand, grew at a 7.3 percent pace in the second quarter -- not quite as strong as the 8 percent increase estimated a month ago but a major improvement from the first quarter when it contracted at a 4.4 percent rate.

Most key indicators support a view expressed by private forecasters, as well as by Bush administration officials including Treasury Secretary John Snow, that GDP growth will top four percent during the final six months of this year. Sales of new and existing homes in August, reported on Thursday, were strong and interest rates remain relatively low, while manufacturing has been showing tentative signs of revival from a deep slump.

The GDP report showed businesses drew down inventories at a $17.6 billion a year rate in the second quarter compared with a $4.8-billion increase in the first three months of the year. This was a solid indication that companies can safely ramp up production or consider investment in new production operations once they feel certain demand will remain firm.

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