Smith Faculty Opinion Article

Peter Morici By Dr. Peter Morici, Professor of International Business
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August 28, 2008

GDP UP 3.3 Percent in Second Quarter

Today, the Commerce Department reported second quarter GDP rose 3.3 percent, as compared to 0.9 percent in the first quarter. Stronger exports, reduced imports and increased personal consumption contributed importantly to this strong growth report.

The weaker dollar against the euro contributed importantly to improvements in the inflation-adjusted trade balance. A weaker dollar made U.S. exports more price competitive against European rivals and caused many imports to become more expensive. However, with growth slowing in Europe, Japan, China, and elsewhere and the dollar recovering a bit, it is questionable whether export strength will continue.

Consumer spending was given a big bounce from the stimulus package tax rebate checks, especially during May and to a lesser extent in June. However, the effects of that stimulus package have now worn off and consumer activity is slowing.

Friday, the Commerce Department publishes estimates for July consumer spending, and this will provide a key first glimpse into third quarter growth. The consensus forecast is for consumer spending to fall by 0.2 percent for July, as compared to the 0.8 and 0.6 percent increases recorded in May and June. My forecast is for a very small gain of 0.2 percent in July but that still would not be enough to offset the effects of inflation. Real consumer spending appears to be contracting.

Weighing together likely slowdowns in export growth and consumer spending, and the continued troubles in the banking and housing sectors, forecasters expect GDP growth to slow to about 1.5 percent in the third quarter and to near zero in the fourth.

The good news is that productivity growth remains strong, American industry continues to bang out new creative and attractive products, and the economy is likely to have only a shallow recession.

The economy should bottom out in the fourth quarter of this year and the first quarter on 2009, and then recover. Don’t look for the Federal Reserve to raise interest rates before 2009.

The 3.3 percent “preliminary” second quarter GDP growth published today was an upward revision from the 1.9 percent “advance” estimate issued July 31. The upward revision reflected increased contributions to GDP from net exports and private inventory investments.  

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.