Friday, July 27, 2007

GDP Grew 3.4% in Second Quarter As Core Inflation Readings Eased

By JEFF BATER (Wall Street Journal)

WASHINGTON -- The U.S. economy resurged in the second quarter from its wintertime fizzle as the drag from the housing sector lessened, businesses built inventories, and exports grew.

Gross domestic product rose at a 3.4% annual rate April through June, the Commerce Department reported Friday.

The first estimate for second-quarter GDP showed the economy rebounded from its paltry, downwardly revised 0.6% advance during January through March. Previously, Commerce estimated first-quarter growth at 0.7%.

Inflation gauges were mixed. The government's price index for personal consumption surged 4.3% April through June, after rising 3.5% in the first quarter. But the PCE price gauge excluding food and energy rose just 1.4% April through June, after climbing 2.4% in the first quarter.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.9% April through June, after increasing 3.8% in the first quarter. The chain-weighted GDP price index advanced 2.7% April through June, after increasing 4.2% in the first quarter.

The 3.4% pickup in growth exceeded of Wall Street expectations for GDP, which is a measure of all goods and services produced in the economy. The median estimate of 25 economists surveyed by Dow Jones Newswires was a 3.3% increase.

GDP accelerated April through June at its fastest since 4.8% in first-quarter 2006 even though consumer spending slowed sharply. The biggest component of GDP, consumer spending rose 1.3% in the second quarter. It had increased 3.7% during the first quarter. Consumer spending accounts for the lion's share of economic activity -- about 70%. It made a contribution of 0.89 percentage point to GDP in the second quarter.

Second-quarter services spending rose by 2.2%, after increasing 3.1% in the first quarter. Consumer purchases of durable goods rose 1.6% in April through June, after increasing 8.8% in the first quarter. Durable goods are expensive items designed to last at least three years, such as televisions and refrigerators. Second-quarter nondurables spending fell by 0.8%, after increasing 3.0% in the first quarter.

Residential fixed investment, the GDP component that includes spending on housing, dropped, but the decrease of 9.3% was much smaller than previous quarters. First-quarter spending fell by 16%. Fourth-quarter spending dropped 17%. Third-quarter 2006 spending plunged 20%.

The second-quarter decline in housing took a bite of 0.49 percentage point out of GDP, compared to a bite of 0.93 in the first quarter.

Businesses increased inventories by $3.6 billion in the second quarter, after drawing down supply by $100 million in the first quarter and $17.4 billion in the fourth quarter.

The buildup of inventories added 0.15 percentage point to second-quarter GDP. In the first quarter, inventories had robbed GDP of 0.65 percentage point.

Real final sales of domestic product, which is GDP less the change in private inventories, climbed 3.2%, above a 1.3% increase in the first quarter.

International trade added to GDP in the second quarter. U.S. exports climbed by 6.4%, and imports decreased 2.6%. In the first quarter, exports had gone up 1.1% and imports rose 3.9%. Trade added 1.18 percentage points to GDP, after reducing GDP by 0.51 percentage point in the first quarter.

Businesses increased second-quarter spending by 8.1%, after rising 2.1% in the first quarter. Investment in structures surged 22.1%. Equipment and software rose 2.3%.

Federal government spending rose 6.7%. First-quarter spending decreased 6.3%. State and local government outlays increased 2.9%.

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