Economy gets big stimulus boost

U.S. gross domestic product grew by 3.3% in the second quarter - much more than previously stated. Economists say the economic stimulus package contributed to the rise.

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By David Goldman, CNNMoney.com staff writer

Most of the Uncle Sam stimulus checks have been sent out. How did you use your rebate?
  • Spent it on essentials
  • Paid credit card debt
  • Added to my savings
  • Splurged on something fun

NEW YORK (CNNMoney.com) -- A revised reading on gross domestic product announced Thursday showed much better U.S. economic growth than previously reported for the second quarter.

GDP, the broadest measure of the nation's economic activity, stood at an annual rate of 3.3% in the quarter, adjusted for inflation, the Commerce Department said.

Economic growth between 2.5% and 3.5% is typically viewed as the norm for a healthy economy.

The revised result surpassed last month's initial estimate of 1.9%. It also surprised economists surveyed by Briefing.com who expected a revision to 2.7%.

Stimulus works: The $90 billion in economic stimulus payments that reached taxpayers during the quarter helped boost GDP up from just 0.9% growth in the previous quarter.

Personal spending helped add 1.2% to the second-quarter preliminary GDP reading released Thursday, up from the advanced reading of 1% for the quarter and just 0.6% in the first quarter.

But many economists say the boost in consumer spending is a temporary factor attributed to the tax rebate checks, making the jump in the second quarter an anomaly.

"We got a decent boost from the stimulus, which hit the economy at a time when we really needed it," said Wachovia senior economist Mark Vitner. "It will have less of an impact going forward, though and we may even have a payback in the fourth quarter."

Trade helps too: The increase from the initial estimate was also partially due to June's U.S. trade gap reading, which was not available until after the advanced GDP numbers were reported. Much improved demand for U.S. exports added 3.1% to GDP, compared to just 0.8% in the advanced reading.

"We would have had growth even without the stimulus, as much of the rise in GDP had to do with the trade deficit," Vitner added.

A pickup in government spending, particularly a 0.4% rise in defense spending by the federal government, also boosted GDP.

But imports declined over the period, meaning lower inventory levels for retailers, which account for more than half of all GDP. Changes in non-farm inventories subtracted nearly 1.3% from overall growth.

Inflation: The government report also showed mixed readings for inflation in the previous quarter.

The GDP price index, the so-called "price deflator," which measures prices overall, rose at a 4.2% annual rate.

But the core PCE deflator - a more closely watched inflation reading that measures prices that individuals pay excluding volatile food and energy prices - rose 2.1%, the same as was reported in the first GDP report.

Inflation is still just barely above the perceived comfort zone of central bankers. The Federal Reserve is generally believed to want to see the 12-month change in core inflation readings remain between 1% and 2%.

"Without a price spiral, the Fed won't have to squeeze the life out the economy, which should help sustain modest economic growth," Vitner said. To top of page

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