U.S. Economy Grew at a 3.4% Annual Rate in Q2

The U.S. economy grew last quarter at the fastest pace in more than a year, propelled by rising exports, commercial construction and government spending.

The 3.4 percent annual pace of growth for gross domestic product was the fastest since the first quarter of 2006 and followed a 0.6 percent gain in the first quarter, the Commerce Department reported today in Washington. The Federal Reserve's preferred inflation gauge rose at the slowest pace in four years.

Spending on commercial construction projects rose at the fastest pace in 13 years, helping to overcome another drop in homebuilding. Factories ramped up production to fill orders from Europe and Asia that made up for a slowdown in consumer spending. Smaller price increases may be of some comfort to Fed policy makers, who have said inflation is their biggest concern.

``It was a pretty solid rebound,'' Ellen Zentner, an economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said before the report. ``Exports are rising because world economic growth is racing along and the U.S. dollar is cheap.''

The report is the first for the quarter and will be revised in August and September as more information becomes available. The first quarter's growth rate was the weakest since 2002.

Economists forecast a 3.2 percent gain in second-quarter GDP, according to the median of 85 estimates in a Bloomberg News survey. Projections ranged from 2.2 percent to 4.1 percent.

The report's price index rose at an annual rate of 2.7 percent, down from 4.2 percent in the first quarter.

Inflation Cooled

The Fed's preferred inflation gauge, which is tied to consumer spending and strips out food and energy costs, rose 1.4 percent, down from 2.4 percent. Policy makers including Chairman Ben S. Bernanke have said a 1 percent to 2 percent increase is preferable.

American consumers, who kept the economic expansion alive in the first three months of the year, were a weak spot last quarter. Consumer spending, which accounts for about 70 percent of the economy, slowed to a 1.3 percent annual pace, the weakest since the last three months of 2005, from 3.7 percent the previous three months.

The slowdown in consumer spending makes it more likely that the second quarter will prove to be the strongest of the year, economists said.

The trade deficit narrowed to an annual pace of $577.9 billion last quarter from $612.1 billion. The smaller gap added 1.2 percent to growth, after subtracting 0.5 percent the prior quarter.

Manufacturers are benefiting from the gain in overseas demand. Eaton Corp., the world's second-largest maker of hydraulic equipment, last week increased its annual profit forecast.

`Real Strength'

``While the consumer side is a little weaker, there's real strength in the manufacturing side,'' Alexander Cutler, chief executive officer of Eaton, said in a July 16 interview. ``The lower value of the dollar means it's a great time to export from the U.S.''

Business fixed investment, which includes spending on commercial construction as well as equipment and software, rose at an 8.1 percent annual rate, after increasing at a 2.1 percent rate the prior quarter.

Investments in new structures, such as factories, warehouses and office buildings, rose at a 22 percent pace, the most since 1994. Spending on new equipment and software increased at a 2.3 percent pace.

A Commerce report yesterday cast doubt on the strength of business spending on new equipment in coming quarters. Orders for durables goods excluding transportation equipment unexpectedly fell in June.

`No Momentum'

``There is no momentum entering the third quarter,'' Josh Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, said before the report.

Businesses were still reluctant to expand stockpiles. Companies added to stockpiles at a $3.6 billion annual rate last quarter after a $0.1 billion annualized first-quarter gain. The figures added 0.2 percentage point to growth. Some economists had predicted inventories would add ...

U.S. Economy Grew at a 3.4% Annual Rate in Q2

7/27/2007 5:58:50 AM