Economy warms up by 3.4 percent

The economy snapped back from a winter stall with a healthy 3.4 percent gain in the spring quarter, led by strong exports and a boom in building by businesses, the Commerce Department reported yesterday.

Consumers, whose spirits were dampened by record-high gasoline prices, took a holiday during the quarter and housing retreated further. But the overall good news failed to perk up the stock market, where the Dow Jones Industrial Average lost another 208 points yesterday after falling 312 Thursday, completing a nearly 5 percent loss for the week that was the worst for stocks in five years.

“The carnage in the stock market” was the result of massive unwinding of leveraged bets in stocks and bonds, and was “a reflection of credit conditions, not economic fundamentals” which remain sound, said Jeoff Hall, analyst with Thomson Financial.

In a rare occurrence this decade for the economy, nearly every major sector contributed to the spring revival of growth, led by an eye-popping 22 percent jump in business spending on such structures as office buildings, factories and hotels, and strong 6.4 percent growth in exports that, for the first time in years, was not outweighed by greater growth in imports.

“It was a fortunate confluence of events that showed all the sectors of the economy pulling in the same direction,” said economist Robert F. Dieli of RDLB, an economic-modeling firm. The report should not be taken as a return to stronger growth, he said, but rather a rebound from unusually depressed first-quarter growth of 0.6 percent, bringing the combined quarters close to the 2.4 percent average rate of the last year and a half.

The rare contribution to growth from international trade, which accounted for more than a third of the quarter’s growth, should be taken with a grain of salt, he said, because it may be revised downward by the department in the next two months. Nevertheless, it suggests that strong growth overseas is combining with big declines in the dollar to finally tame the trade deficit.

“The weakness of the dollar is playing a role here, but just how much is a mystery,” Mr. Dieli said, as the flagging currency makes imports more expensive and exports cheaper in foreign markets.

A smaller contraction in housing, which fell by 9.3 percent after plunging by 16.3 percent in the first quarter, also for the first time in months was not severe enough to outweigh the spike in commercial building, suggesting that the construction market may have found some equilibrium. Economists say the commercial construction boom explains why the housing recession has not resulted in more construction job layoffs.

Christian E. Weller, analyst with the Center for American Progress, said the surprisingly strong growth in commercial building was the fastest in 13 years, but it is not likely to continue because it came as prices for commercial buildings were falling — raising questions about the profitability of such construction projects.

The big push the economy got from international trade during the quarter also was welcome, he said, but it too is threatened by the rising cost of fuel imports, which have negated gains in exports in previous quarters.

“Right now the economy appears to be moving away from its old reliance on American consumers and toward a more investment and export driven model,” he said.

“If business investment and international trade remain strong, the U.S. economy may be able to avoid the grim, predicted outcomes in the wake of the current housing crisis, [but] It is clearly too early to pop the champagne bottles since higher oil prices and lower commercial construction prices could dampen the positive momentum.”

One of the biggest questions arising from the report is whether the anemic 1.3 percent rise in consumer spending signals a long-expected slowdown among consumers stemming from the deteriorating housing market or only a temporary setback caused by record gasoline prices over $3.20 a gallon in May, economists said.

Revisions to the growth report for 2004 through 2006 found that consumer incomes were 0.3 percent higher than previously reported primarily because of higher dividend and interest income, while economic growth was 0.3 percent lower mainly because consumer and government spending was lower. Growth last year measured 2.9 percent, revised down from 3.3 percent.

While the revisions suggest that productivity growth was not as strong as previously thought, one positive result of the changes was to lift estimates of the consumer savings rate back into positive territory, said Stephen Stanley, chief economist at RBS Greenwich Capital, though he added that savings last year was still “woefully low” at 0.4 percent.