US GDP vaults on exports, spending; may soon sag

The revised GDP figure was much stronger than the 2.7 per cent gain Wall Street analysts had expected.

The report added to evidence the US economy may skirt the downturn many had forecast as a result of a deep decline in housing markets, tight credit and high energy and food prices.

US stocks were up more than one per cent at midday on the economy’s unexpected vigor and the dollar pared losses against the euro, while Treasury debt prices fell.

“It’s clear that the second quarter not only wasn’t a recession quarter, it was actually a very robust quarter,” said Michael Englund, chief economist for Action Economics in Boulder, Colorado. GDP had grown at a sluggish 0.9 per cent rate in the first quarter after a 0.2 per cent contraction in the final three months of 2007. The fourth quarter of last year was the weakest since July-September 2001, when the economy was in recession.

The Federal Reserve has held benchmark interest rates at 2 per cent since April to bolster the struggling economy. Growth in the second quarter at close to the level of long-term trends could make it easier for the Fed to raise interest rates to combat troublesome inflation.

However, many analysts worry that exports and consumer spending, which have buoyed the economy, are likely to taper off in the second half of the year as government-support spending dries up and weakening global growth and a stronger US dollar crimp demand from abroad.

“This number seems to overstate the underlying strength even though exports are obviously strong,” said James O’Sullivan, an economist at UBS Securities in Stamford, Connecticut.

Consumer spending, which fuels two-thirds of the US economy, grew at an upwardly revised 1.7 per cent rate in the second quarter rather than the 1.5 per cent pace first reported.

Meanwhile, exports grew at a 13.2 per cent annual rate instead of the 9.2 per cent pace initially estimated. In all, a narrowing trade gap contributed more than 3 per centage points to GDP growth. Housing, however, continued to be a sore spot. Residential construction fell at an annual 15.7 per cent pace, slightly more than the 15.6 per cent decline reported earlier.