The price of gasoline may be high, good jobs may be hard to find and the housing market may be frothy, but the U.S. economy just keeps rolling...
WASHINGTON — The price of gasoline may be high, good jobs may be hard to find and the housing market may be frothy, but the U.S. economy just keeps rolling along, according to yesterday’s government report of gross domestic product (GDP) figures.
The Commerce Department said in its first estimate that the economy grew at a solid 3.4 percent annual rate in the second quarter, down slightly from the first quarter’s 3.8 percent, but still highly respectable.
But what is next? The answer from most analysts is more of the same — steady but unspectacular growth amid swirling negative forces like slow global economic growth, rising oil prices and the uncertainty of terrorism.
The U.S. economy’s ability to weather these blows has been a contributor to the stock market’s rise and to improved consumer attitudes.
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Some analysts said yesterday that they expect the economy to accelerate in the third and fourth quarters, while others said they expected growth might either remain the same or taper off slightly.
“I think there’s a good chance it go could above 4 percent in the third and fourth quarters,” said William Mulvihill, economist at Claymore Securities in Chicago, one of the more optimistic analysts.
For nine straight quarters, the economy has grown at more than a 3 percent annual rate, a momentum that has proved hard to stop.
Inflation, however, was up. The Commerce Department said prices increased by 3.3 percent in the second quarter, compared with 2.3 percent in the first quarter. Food and energy prices were responsible for the acceleration.
Also, wages and benefits grew 0.7 percent in the second quarter, the Labor Department said yesterday. Critics of the Bush administration said that despite the rise in income, a disproportionate amount of the increases are going to the wealthy, creating a greater income gap in the United States.
One force likely to affect the economy the rest of the year is rising interest rates. Indeed, the Federal Reserve is expected to raise short-term rates another notch Aug. 9 and bring its benchmark short-term lending rate to 3.5 percent. By year’s end, said economist Sung Won Sohn of California’s Hanmi Bank, the rate could reach 4 percent.
“This has critical implications for monetary policy and backs up our view that the FOMC [Fed] will have to keep tightening longer than the market has been expecting,” said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Conn.
Janet Yellen, president of the Federal Reserve Bank of San Francisco, said yesterday the Fed needs to keep raising rates because there’s still too much stimulus in the economy. “Things are in reasonably good shape,” she told an audience in Portland.
The solid growth has driven up profits strongly and puffed up the amount of cash that corporations have on hand, said Michael Drury, economist at McVean Trading & Investments in Memphis, Tenn. He noted the GDP report showed business investment went up by 9 percent, a customary sign that more hiring will follow.
But, said Sohn, “The corporate sector could be turning more cautious,” citing concerns on the horizon. “Layoffs are on an uptrend. Small-business confidence is softening. The growth rate of employment has peaked. There is a good chance that profit growth has topped.”
Still, he acknowledged, the economy seems to be shrugging off such concerns.
“The underlying strength seems to be solid,” Sohn said.
Stanley and Yellen comments provided by Bloomberg News