Economy grew at 1.9% rate in Q2; jobless claims jump

The economy grew at a muted 1.9% annual pace in the second quarter of the year, buoyed by federal tax stimulus checks and strong exports, the Commerce Department said Thursday.

The figures were an improvement on the 0.9% pace of growth in the first three months of the year.

Commerce Department's revised figures also showed the gross domestic product, broadest measure of goods and services produced in the USA, actually fell at a 0.2% annual rate the final three months of 2007, worst showing since the third quarter of 2001, when the economy was last in a recession. That had earlier been estimated as a 0.6% gain.

Economists expected the economy to grow at a 2.3% rate in the second quarter. But even though the figures were more sluggish than expected, they could turn out to be the high water mark for the year.

In a recent survey by USA TODAY, 54 top economists predicted economic growth will slow to a barely perceptible 0.2% annual rate by the fourth quarter.

Ian Shepherdson, Chief U.S. Economist at High Frequency Economics, called Thursday's numbers "soft and worse to come."

The impact of federal tax rebate stimulus checks will wane in coming weeks, as consumers continue to struggle with high gasoline and food prices, a depressed housing market and growing unemployment.

Business inventory investment was weaker than expected in second quarter. Personal income rose 7.4%, compared to a 3.7% rate in the earlier quarter. The Commerce Department said the improvement was primarily due to the tax rebate checks.

Likewise, consumer spending rose at a 1.5% rate in the second quarter, up from a 0.9% pace in January through March.

The economy was also buoyed by commercial real estate construction and state and local government spending. The housing market continued to be a drag on growth, as did the faltering domestic auto market.

Commercial real estate construction rose at a 14.4% rate in the quarter, while housing activity slid 15.6%. Stilll, housing was somewhat less a drag than in the past quraters — it declined at a 25.1% pace the first three months of the year.

Imports declined at a 6.6% pace during the quarter, while exports rose at a 9.2% rate. The lower value of the U.S.dollar against other currencies has made exports cheaper on world markts, while pushing up the price of imports. The technology sector was a plus. Government spending jumped at a 6.7% rate during the period. Defense spending was up 7.3%

"The economic situation in the U.S. is certainly worse than suggested by today's report," says Harm Bandholz, economist at UniCredit Markets and Investment Banking.

Bandholz says exports and consumer spending won't be as strong going forward, while commercial construction is likely to decline. He expects the economy to grow by an average 1% in the second half of this year.

In a second report Thursday, the Labor Department said the number of workers filing new claims for jobless benefits rose 44,000 to a seasonally adjusted 448,000 the week ended July 26 from a revised 404,000 the prior week. It was the highest number since April 2003.

Part of the jump was blamed on special factors. "Several states have indicated that they are experiencing increases in initial claims as an indirect result of the emergency unemployment compensation program," the Department said.

The GDP report showed that the billions of dollars in tax rebates, centerpiece of the government's $168 billion stimulus package, spurred consumers to spend in some areas. Spending on furniture and household appliances rose, while people cut spending on cars.

An inflation gauge tied to the GDP report showed all prices galloping ahead at a rate of 4.2% in the second quarter, fastest pace since the end of last year.

However, when energy and food costs are stripped out, all other — or "core" — prices rose at a pace of 2.1%, down from a 2.3% rise in the first quarter. Still, the second-quarter's core inflation reading is outside the Fed's comfort zone.

Given mounting inflation fears, the Fed in June halted a nearly year-long campaign of rate cuts to shore up the economy. It is expected to hold rates steady again next week. Boosting them too soon to fend off inflation could hurt the economy and the already crippled housing market.

There's been a lot of debate about whether the economy is on the brink of, or has fallen into, its first recession since 2001. Under one rough rule, if the economy contracts for two straight quarters it is considered to be in a recession.

But that didn't happen in the last recession, in 2001. The unofficial determination, made by a panel of academics at the National Bureau of Economic Research, usually comes well after the fact. The panel takes into account economic activity, as well as employment, income and other factors.

As part of the annual revisions, the government marked down growth in 2005, 2006 and 2007. Last year the economy grew 2%, weakest showing since 2002. The revisions are based on more information and improved methodologies.