Second quarter Gross Domestic Product (GDP) growth rose to 2.4% after two quarters of 1.4% growth. Spending grew progressively over the quarter so the summer quarter began with July much stronger than April. The forecast anticipates a return to 3% plus growth for the rest of the year and about 4% next year. The added spending will be driven by the rapidly growing federal deficit—defense, tax cuts and a Medicare drug plan—as well as rapidly growing exports. The trade improvement results both from a cheaper dollar and the expected pickup in GDP growth in Europe and Asia.

Second quarter Gross Domestic Product (GDP) growth of 2.4% was a bizarre mix of trends. Higher consumer purchases of vehicles, electronics and household durables accounted for all of the growth. But a high level of imported goods actually hurt GDP. (This negative impact will lessen with import prices now rising as the dollar falls.) Meanwhile, increased defense spending accounted for 1.7 points of the growth. Meanwhile, more investment in equipment and buildings added 1.0% to GDP growth while inventory reductions subtracted 0.8%. Ahead, both will be much stronger.

Equipment investment has rebounded from a war-related dip in the first quarter. The gain was all electronics with industrial equipment spending steady. Investment in industrial equipment will begin rising slowly this quarter. Business software purchases increased at a 5.6% annual pace with growth likely to double early next year. Stand-alone warehouse construction spending increased for the second quarter after a 33% decline over six quarters. Construction spending for warehouse space was steady in the spring after a steep decline. It is forecast to begin rising in the third quarter.

Inventories fell more than $5 billion from the first to the second quarter, pushing the economy-wide inventory/sales ratio down to 1.98 from the 2.01–2.02 level where it had been stuck for more than a year. As the most comprehensive inventory measure, this number includes inventories at all stages of production and distribution. A lower ratio could be in part from fewer links in the supply chain. The inventory/sales ratio was steady for wholesalers, up marginally for retailers and down slightly for manufacturers with more decline expected.