GDP continues to move ahead at a strong clip

By by DARYL DELANO, Delano Data Insights -- Modern Materials Handling, 9/1/2000

Although the Federal Reserve Board has tried to slow the fast-charging U.S. economy by raising short-term interest rates, the good economic numbers keep on coming and the good times keep on rolling.

In late July, the Commerce Department reported in its quarterly estimate of Gross Domestic Product (GDP) that the economy appeared to grow at a vigorous 5.2% annual rate from April-June 2000.

This number, however, is preliminary, based on some incomplete economic and market research data for the second quarter of 2000. Actual growth reflected in two subsequent revisions to this report might show that economic expansion wasn't quite this robust. But there's no question that economic growth during the April-June period far exceeded what economic forecasters and policy makers had expected.

The personal consumption expenditures (PCE) component of GDP did, in fact, show that higher interest rates were finally beginning to have a significant impact on consumer spending. PCE grew at a 3.0% seasonally-adjusted annual rate during the second quarter of this year-the slowest rate since the second quarter of 1997. By contrast, PCE had soared at a 7.6% annual rate during the first 3 months of 2000-the sharpest quarterly gain in 17 years.

But this pullback by shoppers was more than offset by exceptionally strong growth in business investment and inventory accumulation. Capital spending for new equipment and software grew at a seemingly unsustainable 20.6% annual rate during the first 3 months of this year. But preliminary estimates peg second quarter 2000 business investment spending at just as high a level as in the first quarter of the year, with a 21.0% annualized increase.

All-in-all, despite the slowdown in consumer spending, the second quarter 2000 GDP report was hardly the picture of moderation for which economic policy makers had been looking. The soft landing of slower, sustainable economic growth, with less potential for igniting a debilitating period of wage and materials price inflation, still seems a long ways off.

There were, nevertheless, some hopeful signs of easing demand pressures in the Q2-2000 GDP report. For one thing, inventories expanded at almost double their rate of growth during the second quarter of the year than they did during the January-March period. And the bulk of this excess inventory accumulation was at the retail level. The bottom line here is that although U.S. manufacturers continued to churn out product during the second quarter of this year, consumers were more reluctant to buy this product given changes in the interest rate environment, stagnation in the stock market, and smaller wage gains. Thus, industry orders and production are both likely to fall back a bit over the balance of 2000 as retailers work off this excess inventory.

The other notably positive news coming out of this year's second quarter GDP report was on the inflation front. Prices paid by U.S. purchasers of all goods and services during the second quarter of 2000 increased at a 2.2% annual rate-well below the 3.8% increase recorded during the first 3 months of this year.