Defense Spending Driving U.S. Economy

7/31/03
By Glenn Somerville

WASHINGTON (Reuters) - The biggest surge in defense spending since the
Korean War era helped drive U.S. economic growth ahead at a surprisingly
brisk 2.4 percent annual clip in the second quarter, the Commerce

said on Thursday.

The pickup in gross domestic product, or GDP, coupled with a separate

showing a further decline in new claims for unemployment benefits last

electrified financial markets as hopes grew that a second-half revival was
at hand.

The unexpectedly strong advance in GDP followed anemic annual growth rates
of 1.4 percent in each of the two prior quarters. The second-quarter

handily surpassed Wall Street economists' forecasts for a 1.5 percent
second-quarter expansion.

Separately, the Labor Department said the number of new claims for
unemployment benefits fell last week by 3,000 to a revised 388,000 -- the
third straight weekly decline and well below the psychologically important
400,000 level.

Analysts said the data point to a fairly broad-based economic

especially heartening with Bush administration tax cuts forecast to add

juice ahead.

"It's a positive indication that the economy is recovering and that it was
improving at a somewhat faster rate than initially expected during the
second quarter, and that it would be likely that the rate of improvement
would increase going forward as the tax cuts begin to hit," said Joe

a managing director of Stoneridge Investment Partners LLC.

BRIGHTENS HOPES

Second-quarter GDP growth was the strongest since a 4 percent rate of
increase in the third quarter last year.

"Growth in the second quarter was boosted by federal defense spending, by
business investment in plant and equipment, and by consumer spending,"
Commerce noted.

Spending on defense, much of it to support the war in Iraq (news - web
sites), shot up at a 44.1 percent rate -- the strongest since 110 percent

the third quarter of 1951 -- after falling 3.3 percent in the first three
months of the year.
Economist James Glassman of J.P. Morgan Chase in New York said both GDP

lower jobless claims were "quite promising" in the sense of implying that
consumers and businesses saw better times ahead, even if growth is still
below what is needed to reduce the unemployment rate.

"On GDP the trend is not impressive and no one was expecting it to be
impressive but the composition of growth is, and it just reinforces the
optimism about a second-half pickup," Glassman said.

The dollar's value climbed against other major currencies after the GDP
data, in the apparent belief a U.S. economic rebound will outstrip those

other major regions and make U.S. investments relatively more attractive.

On Wall Street, stock prices bounded higher on the positive economic news,
while bond prices tumbled in expectation investors would find equities a
better bet for future gains.

Business investment, which has lagged during the slow expansion from the
2001 recession, showed definite signs of revival in the spring quarter.

Nonresidential spending -- the broadest category of investment -- rose at

6.9 percent annual rate in the second quarter after decreasing 4.4 percent
in the first three months.

Consumer spending, which fuels two-thirds of national economic activity,
added to the second-quarter pace of expansion. Spending, especially on new
cars and other costly durable goods, climbed to a 3.3 percent rate from 2
percent in the first three months of the year and was the strongest since

4.2 percent increase in the third quarter of last year.

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--
A hard truth appears to have escaped the notice of the public and received
scant attention from the media: Bush is the first president in American
history to use deceptive propaganda as his main means of communications in
selling his policies. His pattern of deception continues unabated and in
direct conflict with the notion of the public's informed consent that is
central to American democracy.

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