An emergency dose of government stimulus helped the U.S. economy grow at a 1.9 percent annual rate in the second quarter, a soft pace but enough to take it off a path perilously close to recession.
Revised data from the Commerce Department released with the second-quarter figures on Thursday showed national output shrank in the final quarter of 2007 before barely edging up at the start of this year.
"With the boost from the tax rebates now fading, lower interest rates having little positive impact and signs emerging that overseas demand is weakening, we expect the economy to contract outright in the second half of this year," said Paul Ashworth, senior U.S. economist for Capital Economics of London.
With little more than three months to go before the Nov. 4 presidential elections, Bush administration officials insisted the economy was strong enough to keep growing.
The second-quarter advance in gross domestic product, or GDP, followed a slim revised growth rate of 0.9 percent rate in the first quarter that previously was reported as 1 percent.
That followed a 0.2 percent contraction in GDP during the final quarter of last year and skirted the popular definition of recession as back-to-back quarters of declining output but provided no comfort to financial markets.
U.S. stock prices were weaker and Treasury debt prices gained as investors sought safer haven. The dollar held steady against other major currencies.
Adding to a sense of foreboding about the economy, new claims for jobless benefits unexpectedly jumped by 44,000 last week.
Though Labor Department officials said special factors were at play, the jump on claims just ahead of Friday's unemployment report for July reinforced worry about a deeper downturn if consumers retrench on spending for fear of losing their jobs.
Economists surveyed by Reuters had expected GDP to advance by a slightly more robust 2.0 percent in the second quarter.
White House Council of Economic Advisers Chairman Ed Lazear told CNBC that there was still plenty of stimulus money to keep expansion going. (Click here for story). See accompanying video.
"There is a lot left to be spent and we expect that to play out in the second half of the year," Lazear said.
Also on Thursday, the National Association of Purchasing Management-Chicago said that business activity in the Midwest rose unexpectedly in July, snapping a five-month slump.
Democrats, though, said additional stimulus was needed to keep the jobless rolls from swelling in a sluggish economy.
The Commerce Department said businesses reduced inventories at the sharpest rate since the end of 2001, a possible sign they anticipate restrained growth ahead.
A key reading on core inflation -- personal consumption expenditures excluding food and energy -- rose at a 2.1 percent annual rate in the second quarter after gaining 2.3 percent in the first quarter.
The moderation in core prices came despite a jump in overall prices of 4.2 percent from 3.6 percent in the first quarter.
Consumer spending that fuels two-thirds of U.S. economic activity grew at a 1.5 percent annual rate in the second quarter, up from 0.9 percent in the first quarter and 1 percent in the fourth quarter last year.
The department noted that personal incomes had risen more sharply in the second quarter and attributed it primarily to the stimulus payments that the government was issuing to qualifying consumers.
The economy continues to be hobbled by a severe downturn in the housing sector but the drag from it was less severe in the second quarter.
Spending on homebuilding contracted at a 15.6 percent annual rate in the second quarter, down from rates of 25.1 percent in the first quarter and 27 percent in last year's fourth quarter.
The department also issued benchmark revisions for the three-year period 2005-2007, which showed growth was weaker in each year than previously thought.
GDP grew 2 percent in 2007 instead of 2.2 percent, 2.8 percent instead of 2.9 percent in 2006 and 2.9 percent rather than 3.1 percent in 2005.
The fourth quarter of 2007 was the weakest three months since the third quarter of 2001 amid the last official recession when GDP shrank at a 1.4 percent rate.
Businesses kept reducing inventories in the second quarter, possibly a sign that they are bracing for a prolonged period of lackluster growth.
Stocks of unsold goods declined at a $62.2 billion rate -- the sharpest since an $86.7-billion rate in the fourth quarter of 2001 -- after decreases of $10.2 billion in the first quarter and $8.1 billion in the fourth quarter.