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"The second quarter economic performance is not really a bust following the boom of the first quarter," Orr said. "Averaging the two quarters to get a b 3.5 percent growth rate is much more representative of the underlying trends in the national economy."

Contrary to expectations of most analysts, the Commerce Department's annual revisions did not add substantially to the previously reported GDP growth from 1993 to 1996. The modest upward revisions still leave a large unexplained discrepancy between the rapid growth of tax revenues and the moderate GDP increases.

"This continuing gap calls into doubt the validity of GDP estimates, because tax receipts are a more reliable gauge of how much economic growth is actually increasing," Orr said. Orr said that unusual weather patterns and changes in the timing and extent of annual bonuses and tax refunds during early 1997 apparently caused statistical problems.

The big swing factor in the quarters was consumer spending, which inched up only 0.8 percent after adjustment for inflation in the second quarter, following a 5.3 percent burst in the first quarter. The average of 3.1 percent matches more closely with the inflation adjusted personal income growth for the first half.

The most rapid growth once again was in business spending on equipment, up at a 15.1 percent annual rate. Information processing equipment (computers and related) led the charge, up at a 20 percent annual rate. The 1990s expansion has been unique in the degree of investment in new equipment, especially information technology.

"In the second quarter equipment spending generated 77 percent of the overall GDP gain, despite being only 9 percent of the total," Orr said.

There was solid growth in residential construction, up at a 5.7 percent annual rate, following the 3.3 percent gain in the first quarter. Exports surged at a 14.3 percent annual rate during the second quarter, but imports rose even faster, at a 21.8 percent rate, so the net trade deficit worsened to $148 billion from $126 billion. This quarter's trade deficit subtracted 1.2 percentage points from real GDP. Inventories rose bly, at a $66.6 billion annual rate, but since that was about the same addition as in the first quarter, it did not impact GDP growth.

Orr is a senior vice president in economic research in First Union Capital Markets Corporation, a subsidiary of Charlotte-based First Union Corporation. First Union serves 12 million retail and commercial customers and operates full-service banking offices throughout the East Coast from Florida to Connecticut. First Union Corporation had assets of approximately $143 billion at June 30, 1997.

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