Economy Soars; Unemployment, Too

There was good news for the economy Thursday, but it came with a splash of cold water. The nation's economy soared higher in the second quarter, but not high enough to start bringing down the unemployment rate.

The gross domestic product was up 2.4 percent after two sluggish quarters. One big reason was a jump of more than 22 percent in consumer spending, driven in part by low to nonexistent finance costs on new cars.

Business spending surged to 6.9 percent after more than two years of negative growth, while the housing sector stayed strong.

Amid signs of economic improvement, analysts expect the Federal Reserve will hold short-term rates steady at a 45-year low of 1 percent at its next meeting on Aug. 12. The combination of lower borrowing costs, fatter paychecks and tax incentives might spur consumers and businesses to spend and invest more, analysts said.

Some on Wall Street think it's time to party, reports CBS News Correspondent Bill Plante.

"The economy is turning. It looks as if the second half of the year will be significantly stronger than the first," said Greg Valliere of Charles Schwab.

Faster growth is what President Bush has been predicting and what administration officials have been promising for the second half of the year.

But hold on: The good second quarter numbers also got a huge boost from military spending, which grew at an astronomical 44 percent, the highest rate since the Korean war 50 years ago. The obvious question is how long can that last?

"You take away the military spending and you don't see a real healthy economy from this report," says Josh Bivens, with the Economic Policy Institute. "It's a step in the right direction, but it's an awfully shaky step and it's still not roaring along."

And there's also the touchy issue of unemployment, which hit a nine-year high of 6.4 percent in June. Economists say the second-quarter growth number, welcome as it is, would have to be above 3 percent to start a job recovery.

In an encouraging report, new applications filed last week for unemployment benefits dropped by 3,000 to a five-month low of 388,000, the Labor Department said. It marked the third week in a row that jobless claims went down and suggested that the pace of layoffs is stabilizing.

Despite the economy's higher growth, President Bush continues to say he's not satisfied. White House officials know that the numbers are volatile, just as they know there's an election next year and that the economy remains voters' biggest concern.

Democrats point to the lackluster job market as evidence that the president's economic policies aren't working and his tax cuts are digging the country's budget deficit hole deeper. "This administration is in total denial," said Sen. Kent Conrad, D-N.D.

But the Bush administration insists the tax cuts will help the economy grow and eventually create jobs. "The economy is clearly moving in the right direction," said Commerce Secretary Don Evans.

A second Labor Department report showed U.S. workers' wages and benefits grew 0.9 percent in the second quarter, down from a 1.3 percent rise in the previous quarter, as companies kept a sharp eye on costs.

The stagnant jobs market so far hasn't taken a big bite out of consumer spending, a main force keeping the economy going.

Consumers in the second quarter increased their spending at a brisk 3.3 percent rate, up from a 2 percent pace in the previous quarter. After trimming spending on big-ticket items, such as cars and appliances, in the first quarter, consumers ratcheted up such spending on durable goods in the second quarter by a whopping 22.6 percent rate.

Especially encouraging were budding signs that the big freeze on business spending is beginning to thaw. Businesses, which cut spending on equipment and software in the first three months of this year, boosted such investment in the second quarter at a sizable 7.5 percent rate. That marked the biggest increase in three years.

And, after six straight quarters of slashing spending on new plants and structures, businesses boosted such spending by 4.8 percent in the second quarter.

A sustained turnaround in capital investment by businesses is a crucial ingredient to the economy's ability to get back to full throttle, economists said.

"The long drought in capital spending is officially over," declared Ken Mayland, president of ClearView Economics.