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ECONOMIC ANALYSIS: Growth of GDP better than might first appear

August 8, 2005

What happens when the world's largest economy continues to grow at a faster rate than that of any other industrialized nation? The answer is, a tremendous amount of wealth is created.

That's the real reason investment dollars and boatloads of consumer goods continue to land on our shores from abroad every day. Compared to the tepid growth in the rest of the other mature economies around the globe, we are still the best game to be found.

That's a more euphoric spin on the news about second-quarter growth in the national economy than you will read elsewhere, perhaps. After all, the preliminary estimate of 3.4-percent growth in real gross domestic product for the April-June period released by the Bureau of Economic Analysis is actually lower than the revised estimate of 3.8 percent for the first three months of the year.

And, while it is healthy growth by anyone's assessment, it was squarely in line with what most analysts were expecting to see.

In other words, as a news story, the GDP report is really a dud. There will likely be no dramatic reactions, or urgent calls for policy action, as an immediate result. Which is exactly why it is the best kind of news we could hope to receive. Smooth, steady growth may make headline writers frown, but it sure can make businesses, investors and policymakers happy.

And, truth be told, there was a little more drama in the news on the secondquarter economy than the overall growth estimate reveals. Were it not for a sharp correction in inventory accumulation by businesses in the late spring and early summer, overall growth would have been significantly higher.

Strong consumer and business spending led to a marked acceleration in final sales economy-wide, rising 5.8 percent in the second quarter compared with the 3.8-percent rate of growth in the beginning of the year.

But businesses increasingly met that demand by drawing down inventories, instead of ramping up production. The resulting swing in inventory accumulation shaved more than two percentage points off the economy's overall growth rate. That situation could easily be reversed in the second half of the year, especially if spending remains strong.

Particularly heartening for the Indiana economy is the news on business spending. Nonresidential fixed investment accelerated to a 9-percent rate in the second quarter, up from a revised 5.7-percent rate of expansion during the previous period.

What the heck is nonresidential fixed investment, you may ask? It has been the single best predictor of Indiana's economic performance, that's all. It's the spending by businesses nationwide on structures and capital equipment that has been the driving force for the state economy over the last several years. In a nutshell, when businesses across the country are growing their capacity, companies across our state reap the rewards.

And right now, things are going right for the state's economy, as perhaps best seen in state tax receipts. The 2005 fiscal year ended with a bang at the Indiana Department of Revenue.

Sales tax revenue is up nicely, but income tax receipts are growing by leaps and bounds. Second-quarter collections topped the already torrid 11-percent growth posted in the first three months of the year, coming in a whopping 14.2 percent higher than the same time last year.

One last bright spot in the second quarter was the behavior of the trade sector. For the first time since 2001, trade was a net contributor to overall growth in the national economy, with exports surging ahead 12.6 percent at the same time imports actually fell.

As always, obstacles to continued growth loom ahead. But the news for now, if not dramatic, is awfully good.



Barkey is an economist and director of economic and policy study at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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