Bullish US growth figures fuel hopes of turnaround

The US economy grew an unexpectedly robust 2.4 per cent in the second quarter, its best showing in almost a year, spurred by improved consumer and business spending and the biggest jump in defence outlays since the Korean war.

The provisional figures from the Commerce Department yesterday will be seized on by the Bush administration as further evidence that the sluggish economy is finally turning the corner, after two successive quarters when GDP expanded only 1.4 per cent.

They also fit in with the belief of the Federal Reserve chairman, Alan Greenspan, that a recovery is already under way - a belief which this week's moderately bullish Fed "beige book" on business conditions across the country did nothing to discourage. Both Wall Street and the dollar rose on the GDP news, while the rout of the bond market continued as prices plunged and the 10-year yield hit 4.47 per cent, its highest level for a year.

It is now more likely than ever that the central bank will opt to leave short-term interest rates unchanged when its policy-making open market committee next meets on 12 August. Private economists predict growth will hit an annual rate of 3.5 per cent or more in the second half of 2003.

In a further tonic yesterday, the government announced that new applications for unemployment benefits dropped by 3,000 last week to a five-month low. This suggests the rate of lay-offs, which has driven the unemployment rate to a nine-year peak of 6.4 per cent, may be levelling off.

Helped by low interest rates and mortgage refinancing, consumer spending rose a provisional 3.3 per cent in the April-June quarter, while business investment - whose weakness has been among the biggest drags on the economy - jumped 7.5 per cent, the strongest advance in six years.

But these increases were eclipsed by a 44 per cent surge in defence spending due to the Iraq campaign and its aftermath. The quarterly increase was the largest since the third quarter of 1951, at the height of the Korean War.

In a speech yesterday, Jack Guynn, president of the Atlanta Fed and a voting member of the rate-setting FOMC, predicted "a slow build-up in the coming months, instead of a quick and dramatic 'pop' back to a late 1990s pattern of growth". The course of business investment and developments in the jobs market would be the decisive factors, he said.

The strong picture contrasted with the eurozone, where confidence fell, French unemployment rose and a major global economic think-tank slashed its growth forecasts.

The Organisation of Economic Co-operation and Development cut its GDP forecast next year from 2.4 to 2.0 per cent. It urged the European Central Bank to hold rates at 2 per cent for at least a year and stand ready to cut again if necessary. The ECB left rates unchanged yesterday.