US growth estimates revised upwards

The official estimate of US economic output was revised higher yesterday, in a report that surpassed estimates and showed strong rises in consumer and business spending activity.

Gross domestic product (GDP) was revised to an annual rate of increase in the second quarter of 3.1 per cent, up from an earlier estimate of 2.4 per cent, according to a report issued by the US Commerce Department. The report marked the fastest growth in the economy in nine months.

"The numbers are a confirmation of the existing trend or prevailing view that the economy is strengthening, hitting out of the second quarter and into the third," said Mr Nick Bennenbroek, foreign exchange strategist at Brown Brothers Harriman.

The main factors behind the rise in GDP during the quarter were personal consumption expenditures, defence spending by the federal government and non-residential fixed investment.

Among the surprises in the GDP report, business investment on equipment and software was revised to an 8.2 per cent growth rate, the fastest in three years, while consumer spending was revised to 3.8 per cent growth from 3.3 per cent.

Output growth was also supported by a 25.5 per cent increase of real federal government consumption expenditures and gross investment.

"The third quarter is stacking up to be a 4 to 6 per cent quarter," said Mr Jim Glassman, senior economist at JP Morgan in New York. "It's all a demand story and businesses have been surprised by this and will have to build inventories."

Wall Street was down for most of the trading morning, but stocks were flat at midday as traders said the report was encouraging but already priced into the market. Trading volumes were also very thin ahead of the Labor Day holiday. Many traders were also awaiting comments early today by Mr Alan Greenspan, chairman of the Federal Reserve, who will be addressing an economic symposium in Wyoming.

In a separate release yesterday, weekly jobless claims rose by 3,000 for the week ending August 23rd, to 394,000. The more important four-week moving average, however, held steady at 395,750.

The GDP report was the latest sign that the economy and consumer attitudes continued to show progress. Earlier in the week a report on durable goods orders showed them rising 1 per cent in July, and consumer confidence showed a convincing rebound in August.

The employment situation, however, continues to show only sluggish improvement.

The GDP report also contained a summary of corporate earnings for the quarter. Corporate profits before tax increased in the second quarter to $904.8 billion (€831.9 billion) from $816.5 billion in the first quarter. After tax, adjusted for inventories and depreciation as a result of recent tax law changes, profits rose to $670.7 billion from $578.6 billion. Unit labour costs fell sharply during the quarter, a key reason for the rise in profits during the quarter. - (Financial Times Service/Reuters)