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U.S. Second-Quarter Gross Domestic Product Rises at a 3.3% Rate

U.S. Second-Quarter Gross Domestic Product Rises at a 3.3% Rate

Aug. 31 (Bloomberg) -- The U.S. economy grew at a 3.3 percent annual rate in the second quarter as growing sales allowed companies to slow the pace of inventory building.

The quarter's gross domestic product, the value of all goods and services produced in the U.S., compares with a 3.4 percent pace initially estimated and 3.8 percent growth in the first three months of the year, the Commerce Department said today in Washington. A measure of inflation watched by Federal Reserve policy makers was revised lower.

Second-quarter growth was limited by imports that were higher than previously reported and a smaller increase in consumer spending. While economists said growth this quarter is probably accelerating on the heels of a surge in auto sales and inventory rebuilding, record energy costs are a hurdle for the economy later this year.

``Now we might be approaching the level where energy prices really begin to bite,'' Kevin Logan, senior market economist at Dresdner Kleinwort Wasserstein in New York, said before the report. The pace of growth is ``dependent on how long oil remains at this level'' of $70 a barrel, he said.

The government's personal consumption expenditures price index excluding food and energy rose at a 1.6 percent annual rate last quarter compared with a previously reported 1.8 percent rise. The core measure, which Fed policy makers monitor, rose 2.4 percent in the first three months of the year.

Fed policy makers have raised the federal funds rate at their last 10 meetings, pushing it to 3.5 percent from 1 percent as they try to keep inflation from accelerating. Central bankers next meet on Sept. 20.

Nine Quarters

Growth in the world's largest economy has exceeded 3 percent for nine straight quarters, the longest string since the 13 quarters that ended in January-March 1986. Economists surveyed by Bloomberg News from July 29 to Aug. 8 forecast third-quarter growth at a 4.1 percent annual rate.

Economists' forecasts may be pared back after the recent surge in crude oil and gasoline prices to new highs, due in part to Hurricane Katrina. Action Economics LLC economists lowered their third-quarter growth estimate to 4.4 percent from 4.6 percent on the assumption the hurricane would only cause minor disruptions to a handful of facilities lasting less than a week.

The drag on gross domestic product in this case would come from a drop in the level of fuel inventories that couldn't be made up by September, said Michael Englund, chief economist at the Boulder, Colorado-based forecasting firm.

A 3.4 percent annual rate was forecast for the government's revised estimate of economic growth from April through June, according to the median estimate of 72 economists in a Bloomberg News survey. Estimates ranged from a 3.2 percent to 3.8 percent.

Inventories

GDP rose to $11.1 trillion when annualized and adjusted for inflation. Without adjustment, the economy grew at a 5.8 percent annual pace to $12.4 trillion for the quarter compared with a 7 percent pace in the first three months of the year.

Companies added to inventories at a revised $2.6 billion annual rate, compared with a $6.4 billion reduction previously reported and a first-quarter increase of $58.2 billion. Inventories subtracted 1.99 percentage points from growth.

A measure of demand that excludes inventories rose 5.4 percent, less than the 5.8 percent initially reported.

The nation's trade deficit narrowed less than initially estimated and therefore added less to the economy in the second quarter. The narrowing added 1.22 percentage points to GDP, compared with a previously reported 1.6 percentage points.

Housing

Residential construction rose at a 9.8 percent annual rate in the second quarter, the same as estimated last month and compared with 9.5 percent in the first three months of the year.

Personal income rose at a 6.3 percent annual pace in the second quarter, compared with the 5.8 percent estimated last month and with 2 percent the first three months of the year.

Wages and salaries rose to $5.63 trillion in the first quarter compared with the government's previous estimate of $5.647 trillion, revised estimates showed. The revision reflects data on unemployment insurance taxes paid by all employers that are only available with a lag and therefore represent a more accurate measure of income.

Second-quarter wages and salaries, which don't yet reflect the tax data, were revised to $5.71 trillion from $5.716 trillion.

Greenspan

Rising incomes from job growth and equity extraction from home refinancing have helped support consumer spending. Fed Chairman Alan Greenspan said on Aug. 27 that he expects housing's growth to ``simmer down'' and home price increases to slow as a result.

``Home equity extraction will ease and with it some of the strength in personal consumption expenditures,'' Greenspan said in the text of a speech at the close of a two-day Kansas City Fed symposium in Jackson Hole, Wyoming. So far, spending has held up.

Consumer spending, which accounts for about 70 percent of the economy, expanded at a 3 percent annual pace, compared with 3.3 percent estimated in July and 3.5 percent for the first quarter.

``People who purchased three or four years back today are finding money to redecorate their homes,'' Farooq Kathwari, chief executive of Ethan Allen Interiors Inc., said in an interview on Aug. 26. ``This housing boom is giving us a bit of it now rather than three or four years back.''

Business Investment

Orders at Ethan Allen, the second-biggest home furnishings company be stock market value, increased 5.4 percent in the fiscal fourth quarter from a year earlier.

Business fixed investment, which includes spending on commercial construction as well as on equipment and software, rose at an 8.9 percent annual rate in the second quarter. The government estimated last month that business fixed investment rose at a 9.3 percent pace, up from 7 percent in the first quarter.

Spending on equipment and software rose at a 10.4 percent annual rate, compared with the 11 percent previously reported and 8.3 percent in the first quarter.

The GDP price index, a measure of inflation tied to the report, rose at a 2.4 percent annual rate, the same as initially reported.

Higher oil and gasoline prices may limit profits in coming months and crimp business and consumer spending, economists said.

Profit Growth

The GDP report included corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, or profits from current production, rose 6.1 percent, compared with a 5.6 percent gain in the first quarter.

Current-production cash flow, or the internal funds available to companies for investment, rose 4.4 percent in the second quarter compared with 8.3 percent in the first quarter.

Crude oil prices reached a record $70.85 a barrel in New York yesterday after Hurricane Katrina forced companies to evacuate platforms in the Gulf of Mexico. Oil prices closed above $60 barrel for the first time on June 27 and have been above that level every day since the end of July.

``The continuing increase in oil prices, we think, probably is the biggest immediate risk'' to growth, said John Shin, vice president of U.S. economics at Lehman Brothers Inc.

Government spending rose at a 2.7 percent pace from April through June, after a 1.9 percent rise in the first quarter.

To contact the reporter on this story:
Courtney Schlisserman in Washington at [e-mail]


LINK: http://quote.bloomberg.com/apps/news?pid=10000006&sid=a6GU6OTG0Dcw&refer=home