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U.S. Growth Rebounds in Second Quarter

Reuters
Friday, 27 Jul 2007 | 1:06 PM ET

U.S. economic growth rebounded during the second quarter to its strongest pace since the beginning of last year on a surge in business investment, more government spending and a better trade performance, the Commerce Department reported on Friday.

Gross domestic product that measures total output within U.S. borders gained at a 3.4 percent annual rate -- the fastest since 4.8 percent in the first quarter of 2006 -- after barely growing at a downwardly revised 0.6 percent pace in the first quarter. Second-quarter growth exceeded Wall Street economists' forecasts for a 3.2 percent rate of increase.

Following Friday's solid data and after stock markets took a beating on Thursday in one of the market's worst days this year, President Bush and his top economic advisors hastened to prominently proclaim their optimism about the U.S. economy.

In the financial markets, Treasury bonds were moderately stronger as the GDP report also showed signs of lower inflation. Stock prices were in negative territory as worries about deteriorating credit markets persisted.

The GDP data showed the business sector picking up some of the slack left by consumers who cut back on their spending.

"Consumers are clearly taking a breather but other sectors have more than made up for it," said Richard DeKaser, chief economist for National City Corp. in Cleveland, but he cautioned the second-quarter pace of expansion was unlikely to continue.

"We should see slower growth going forward. The economy is basically on a 2-percent growth trend," he added.

A separate report indicated that while consumers might not be spending as much, they did not appear to be worried about the future.

A Reuters/University of Michigan Survey of Consumers said the final July reading on its consumer sentiment index was 90.4, a touch below the median forecast of 91.2 and the preliminary July reading of 92.4, which was a six-month high.

Nearly half of those surveyed expected favorable economic prospects to last into mid-2008.

Bush, following a meeting with his economic team, said a strong global economy was helping buoy U.S. growth.

Treasury Secretary Henry Paulson, in an appearance on CNBC television later, repeated that problems with bad loans in the subprime mortgage area were "largely contained" and that Thursday's global market losses were just a "repricing" of risks.

"We have a strong economy, a strong economy globally, so I take real comfort in that," Paulson said.

The GDP report contained encouraging news on the inflation front, as so-called core prices that exclude food and energy items gained at a surprisingly low 1.4 percent annual rate, the lowest in four years since 1.3 percent in the second quarter of 2003.

Economists had forecast a 2 percent rate of advance in core prices, and hoped the positive GDP performance would calm financial markets roiled by fears of a credit crunch.

"The better-than-expected GDP and lower inflation should provide a floor for the equity markets going into August, the slowest month of the summer," said Steve Neimeth, a portfolio manager with AIG SunAmerica Asset management in Jersey City.

Nonresidential business investment climbed at an 8.1 percent rate in the second quarter, nearly four times the 2.1 percent registered in the first quarter as commercial building activity soared. Home building remained a drag, but less so, shrinking at a 9.3 percent annual rate compared with a 16.3 percent of decline in the first quarter.

Growth in consumer spending that accounts for two-thirds of national economic activity slowed to a 1.3 percent rate in the second quarter from 3.7 percent in the first quarter. It was the slowest rate of growth in consumer spending since 1.2 percent in the final quarter of 2005.

Analysts have been closely monitoring consumers for any sign that a slumping housing market, which has taken home prices down in many regions, will make them more reluctant to add their spending power to the economy.

Some of the impetus for second-quarter growth came from stronger federal government spending, which climbed at a 6.7 percent rate after shrinking at 6.3 percent pace in the first quarter.

Trade also contributed positively to second-quarter performance, as exports grew at a 6.4 percent pace and imports shrank 2.6 percent -- the first time since the first quarter of 2003 that imports contracted.

Businesses also were more willing to add goods to their inventories in the second quarter, which also aided growth.

Stocks of unsold goods increased at a $3.6-billion annual rate, up from $100 million in the first three months of this year.

Along with the second-quarter data, the government issued its annual revision of GDP that showed growth was less robust in each of the past three years than previously reported.

Growth in 2006 was pulled down to 2.9 percent from 3.3 percent, in 2005 to 3.1 percent from 3.2 percent and in 2004 to 3.6 percent from 3.9 percent.

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