US Economy Grows At Fastest Pace In A Year

The U.S. economy surged in the spring, rising faster than first thought, but analysts see the housing slump bogging down growth in the second half of 2007.

Gross domestic product rose at a seasonally adjusted 4.0% annual rate in the second quarter, the Commerce Department said Thursday. Originally, Commerce had estimated growth at 3.4% for the April-through-June period. Stronger business spending and overseas sales led to the upward revision to GDP, the measure of all goods and services produced in the economy. "The government revised its estimate of second-quarter growth and the statisticians managed to find a lot more growth," said Joel Naroff, who runs an economic consulting firm. "Much of it came from an even-better reduction in the trade deficit than first estimated and also in capital expenditures." The new, revised estimate of 4.0% GDP growth was much more robust than the first quarter's listless 0.6% pace and marked the strongest quarterly rate of growth since 4.8% during the first three months of 2006. But the troubles in the housing sector, which spilled into Wall Street this month and sent the stock market reeling, will haunt the economy through the rest of the year, analysts said. "Housing activity is going to weaken significantly further, and consumer spending is soggy," MFR Inc. analyst Joshua Shapiro wrote in a note to clients. "Real GDP growth in Q3 is thus likely to be well below that of Q2, with something on the order of 2.5% now looking to be a reasonable bet. A further slowdown is likely in Q4 as housing continues to bite and output growth slows in line with final demand." Housing is a component of GDP called residential fixed investment. It tumbled by 11.6% in the second quarter, the government said Thursday, a drop bigger than the previously reported 9.3% plunge.

Mortgage Market Woes May Eventually Restrain Consumer Spending

After years of climbing home sales, the housing sector turned. Builders who had broke ground on projects at an ever-rising rate as they watched mounting home prices grew cautious after demand topped out and started receding - a grim trend that left a burgeoning glut of supply of unsold homes. Fears of tightening credit is making a bad situation worse. The slump in housing has sucked growth out of the economy for six straight quarters. The sector's problems seemed to be improving slowly - the second-quarter decline in the housing component of GDP wasn't as sharp as the 16.3% fall in the first quarter, 17.2% in the fourth quarter of 2006 and 20.4% in the third quarter of last year. "Things were well on their way toward a stabilization by mid-2008 before the mortgage credit crunch intervened this summer," RBS Greenwich Capital Markets chief economist Stephen Stanley said. "Now, we may see ongoing declines of 10% or more through year-end and a slower climb back toward zero next year. The second and ultimately most important question mark for growth is whether consumer spending will finally succumb to the housing mess." Consumer spending is the big engine of the U.S. economy. It makes up 70% of GDP. Spending advanced by 1.4% in the second quarter, Commerce data showed. That's up a bit from a previously reported 1.3% increase for the quarter yet far below the first quarter's 3.7% climb. "The tightening mortgage market will send housing construction down even further, while tighter credit conditions and falling house prices will restrain consumer spending," Global Insight chief U.S. economist Nigel Gault wrote in a note to clients. "We expect (GDP) growth in the 1.5%-2.0% range from the fourth quarter of 2007 to the second quarter of 2008." While second-quarter consumer spending growth slowed and housing tumbled, other components of GDP advanced. Thursday's data showed businesses increased inventories in the second quarter by $5.4 billion, adding 0.21 percentage point to GDP. Originally, Commerce estimated a $3.6 billion increase, a contribution of 0.15 percentage point to GDP. Businesses increased inventories by $100 million in the first quarter. Trade gave the economy a bigger push than first estimated - because U.S. exports were revised up, rising by a rate of 7.6% instead of the originally reported 6.4%. Imports fell 3.2%; originally, the decrease was seen at 2.6%. The revised data showed trade added 1.42 percentage points to GDP in the second quarter. Originally, trade was seen contributing just 1.18 percentage points to GDP. Trade had reduced GDP by 0.51 percentage point in the first quarter. U.S. businesses elevated spending in the second quarter more than previously thought. Outlays rose by 11.1% in April through June; originally, spending was estimated rising 8.1%. Business spending climbed just 2.1% in the first quarter. Second-quarter investment in structures by business surged by 27.7%. Equipment and software increased 4.3%.

Fed Is Still Concerned About Inflation

Price inflation gauges contained in the second-quarter GDP data were revised slightly lower by the government, Thursday's report showed. The price index for personal consumption excluding food and energy rose 1.3%, below the previously estimated 1.4% advance. The 1.3% rate was lower than the first quarter's 2.4% increase. "Inflation receded, with the core personal consumption deflator advancing by only 1.3%, revised down from 1.4%," Global Insight's Gault said. "But the year-on-year gain remains at 2.0%, at the upper end of the Fed's comfort zone." The Federal Reserve is concerned about inflationary pressures, according to a statement released Aug. 7, when bankers met on monetary policy. But financial market turmoil fed by anxieties about credit and the subprime loan crisis led the Fed to slice its discount interest rate 10 days later. Wall Street is hoping for a subsequent cut in the Fed's target funds rate. Ben Bernanke, the Fed chief, is scheduled to talk about housing and monetary policy at an economic conference Friday in Wyoming. The Commerce Department data Thursday showed corporate profits strengthened in the second quarter. Profits after taxes grew by 5.4% to $1.154 trillion, after rising by 1.5% in the first quarter. Year over year, profits increased 3.5%. A separate report Thursday showed the number of U.S. workers filing new claims for jobless benefits jumped last week. Jobless claims rose 9,000 to 334,000 on a seasonally adjusted basis in the week ended Aug. 25, the Labor Department said. "Initial jobless claims increased for the fifth straight week in the period ended August 25, rising by 9,000 to 334,000, the highest level since mid-April," RBS Greenwich Capital Markets analyst Omair Sharif said. "Given that there were no special factors in the latest period, it seems that the surge in layoffs in the mortgage industry may be starting to filter through to the data."