By Jeannine Aversa
The Associated Press

WASHINGTON - After idling for months, the economy finally appears to be shifting into higher gear, reinforcing the belief that the it will pick up speed through the rest of the year.

Consumers and businesses bought more. The federal government increased military spending on the Iraq war.

All that bolstered the broadest measure of the economy's performance, the gross domestic product, which grew at an annual rate of 3.1 percent in the April to June quarter, according to revised figures released Thursday by the Commerce Department.

LOCAL COMPANIES

The number of local companies reporting rising production grew again in August, according to a poll by the National Association of Purchasing Management-Cincinnati. About 38 percent of companies polled said production rose in August, compared with 26 percent in July. Only 9 percent of employers said production was down. About 42 percent of companies said new orders were up, the same as last month. The employment outlook hasn't improved. Compared to July, fewer companies in the August poll said they planned to add workers, and more said they'd cut workers. The group's parent organization, the Institute for Supply Management, will issue its national report Tuesday. John Byczkowski

That was faster than the 2.4 percent growth rate first estimated a month ago and came after two straight quarters of lackluster economic growth. GDP, which measures the value of all goods and services produced within the United States, increased at just a 1.4 percent pace in the final quarter of 2002 and the first three months of this year.

"The economy is rolling forward now with considerable momentum, and there's no reason to think we won't have strong economic growth through the rest of the year," Bill Cheney, chief economist at John Hancock, said.

The stock market took small notice. The Dow Jones Industrial Average finished the day up 40.42 to 9374.21, while the Nasdaq Composite Index closed up 18 points, or 1 percent, at 1,800. The Standard & Poor's 500 index rose 6 points to 1,003.

George Mokrzan, a senior economist at Huntington Bancshares in Columbus, said faster economic growth is already old news to the markets. Investors are waiting for job growth, he said.

Amid signs of a revival, the Federal Reserve earlier this month decided to hold a key short-term interest rate at a 45-year low of 1 percent and hinted that the rate may stay at this low level for some time.

Near rock-bottom short-term borrowing costs along with fatter paychecks and other incentives coming from President Bush's tax cut should help boost economic growth, analysts said. But even if that happens, the job market could remain slow.

"Despite the healthier economic outlook, the Achilles' heel of the economy is lack of jobs," said Sung Won Sohn, chief economist at Wells Fargo. The nation's unemployment rate, now at 6.2 percent, could hover in that range or creep higher in coming months, economists said.

Increased productivity at businesses has allowed them to produce more with fewer workers. Businesses will want to feel more secure about the rebound before they go on a hiring spree, analysts said.

In a second report, new claims for unemployment benefits rose by 3,000 to 394,000 last week, the Labor Department said. Some of the increase might be related to people who had to delay filing their applications because of the massive power outage in the Northeast and Midwest, analysts said.

The improvement to second-quarter GDP reflected more military spending for the Iraq war and more robust spending by consumers and businesses than the government previously thought:

• Federal spending on national defense grew at a 45.9 percent rate, the largest increase since the third quarter of 1951 and up from the previous estimated growth rate of 44.1 percent.

• Consumer spending, a main force keeping the economy going, grew at a 3.8 percent pace in the second quarter, up from a 3.3 percent pace first reported. Much of that pickup reflected more brisk spending on big-ticket goods such as cars and appliances.

• Businesses increased spending in the second quarter on equipment and software at an 8.2 percent pace, up from the 7.5 percent growth rate previously estimated, and a turnaround from the cut in such spending during the first quarter of this year.

And, after six straight quarters of cutting spending on plants and other structures, businesses increased such investment in the second quarter at a 7.1 percent rate, also stronger than the 4.8 percent growth rate first estimated for the quarter.

"Businesses had been starving a lot of development spending. To see that beginning to recover is a very good sign," said Carl Tannenbaum, chief economist at LaSalle Bank.

Enquirer reporter John Byczkowski contributed to this report