GDP Surges on Defense Spending

The biggest surge in defense spending since the Korean War era helped drive U.S. economic growth ahead at a surprisingly brisk 2.4 percent annual clip in the second quarter, the Commerce Department (search) said on Thursday.

The pickup in gross domestic product, or GDP (search), from an anemic annual rate of 1.4 percent in each of the two prior quarters, easily beat Wall Street economists' forecasts for a 1.5 percent pace of second-quarter growth and showed relatively broad-based gains.

It was the most robust expansion in GDP since a 4 percent annual rate of increase in the third quarter of last year and is certain to buttress forecasts from Bush administration officials and private analysts for an economic acceleration in the second half of 2003.

"Growth in the second quarter was boosted by federal defense spending, by business investment in plant and equipment, and by consumer spending," Commerce noted. Spending on defense, much of it to support the war in Iraq, shot up at a 44.1 percent rate — the strongest since a jump of 110 percent in the third quarter of 1951 — after falling 3.3 percent in the first three months of the year.

The dollar's value climbed against other major currencies immediately after the GDP data was issued, in the apparent belief a U.S. economic rebound will outstrip those in other major regions and make U.S. investments relatively more attractive.

Business Spending Revives

Business investment, which has lagged during the slow expansion from the 2001 recession, showed definite signs of revival in the spring quarter.

Nonresidential spending — the broadest category of investment — climbed at a 6.9 percent annual rate in the second quarter after decreasing 4.4 percent in the first three months. It was the strongest advance in investment spending in three years, since a 10.2 percent jump in the second quarter of 2002.

Consumer spending, which fuels two-thirds of national economic activity, added to the second-quarter pace of expansion. Spending, especially on new cars and other costly durable goods, climbed to a 3.3 percent rate from 2 percent in the first three months of the year, and was the strongest since a 4.2 percent increase in the third quarter of last year.

The Federal Reserve, which has cut U.S. short-term interest rates to 45-year lows in a bid to spark a stronger recovery, said on Wednesday it saw signs in June and early July that a more vigorous pace of growth was budding as manufacturing activity grew.

"Several districts noted increased optimism about economic prospects in coming months," the U.S. central bank said in its periodic beige book summary of national economic conditions in the 12 Fed districts, adding it saw "nascent signs of a recovery" in a down-trodden manufacturing sector that has shed an estimated 2.6 million jobs since mid-2000.

Spreading the Word

Treasury Secretary John Snow (search), touring two states in the Midwest in company with Commerce Secretary Don Evans and Labor Secretary Elaine Chao on Tuesday and Wednesday, similarly maintained the economy was "spring loaded" for a more powerful second-half performance with growth rising to around a three percent rate in the third quarter and 3.5 percent by the final quarter this year.

The GDP report showed businesses reduced their inventories of unsold goods at a $17.9 billion annual rate in the second quarter after building them up at rates of $4.8 billion in the first quarter and $25.8 billion in the final three months last year.

Slimmed-down inventories generally are considered promising for the future, since it means companies must quickly ramp up production and potentially hire more employees once stronger demand is firmly established.