Modest Increase Expected in GDP - TheStreet

Modest Increase Expected in GDP

On average, economists expect the second-quarter report to show a 1.5% increase, after two quarters of 1.4% annualized growth.
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The government's advance reading on the gross domestic product for the second quarter is expected to show a modest increase of 1.5% Thursday, following two quarters of 1.4% annualized growth.

"The report won't be strong given the poor start to the quarter and the unseasonable weather conditions," said Tony Crescenzi, a bond market strategist at Miller Tabak and contributor to

RealMoney.com

, a sister site to

TheStreet.com

. "But the same way that investors were forgiving of weak April and May data because of the war-related effects, investors may be forgiving of a weak GDP report."

The U.S. economy has been showing few signs it's ready for a robust turnaround, economists say. Factories are operating at 74.3% of capacity, companies are still slashing prices and unemployment is at a nine-year high of 6.4%. Consumers, whose activity represents two-thirds of the U.S. economy, are still cautious, with confidence levels dropping unexpectedly in July.

Crescenzi said one of the keys to the report will be data regarding corporate spending on equipment and software. Considering the 2.1% rise in durable goods orders in June, he believes investors will be looking for strength in this area.

But some experts were offering more encouraging bets. "The numbers will be a bit better than consensus," predicted Joel Naroff, chief economist at Naroff Economic Advisors, who forecast a reading between 2.5% and 3% for the second quarter. In the second half, he expects activity to grow by more than a 4% annualized rate.

"Trade and inventory numbers could add quite nicely to that, and we could get a kicker from government spending, given defense expenditures in Iraq." Naroff expects defense spending to climb between 10% and 15% in the second quarter, but said that how this will affect the GDP numbers will depend on how the spending is accounted for.

In a speech to bankers in Williamsburg, Va., Alfred Broaddus, president of the Federal Reserve Bank of Richmond, said Wednesday that "there are a few signs the recovery may be gaining strength, but there is not much hard evidence that this is happening yet -- certainly no compelling evidence of the pronounced post-Iraq war boost to activity that many people, myself included, had anticipated," he said.

The

Fed

now expects GDP growth of 2.5% to 2.75% in 2003, below its previous forecasts. Meanwhile, the Blue Chip Consensus, a group of economists that provides financial and economic surveys to corporate executives, said earlier this month that U.S. GDP would rise 3.6% in the third quarter and 3.8% in the fourth quarter.

Experts say it isn't unusual for GDP forecasts to differ significantly among economists, especially regarding the advance number, given the guesswork involved in trade and inventory figures. The June data for both indicators will be available in a few weeks and could still fluctuate considerably.