updated 7/29/2005 10:22:05 AM ET 2005-07-29T14:22:05

The economy clocked in at a robust 3.4 percent annual growth rate in the second quarter, fresh evidence the country’s business climate is sunny despite surging energy costs.

Major Market Indices

The solid increase in the gross domestic product for the April-to-June quarter, reported by the Commerce Department on Friday, came on the heels of a larger 3.8 percent growth rate in the opening quarter of this year.

GDP measures the value of all goods and services produced within the United States and is considered the broadest barometer of the country’s economic standing.

Despite the toll of elevated energy prices, consumers and businesses still managed to boost spending and investment modestly, helping to underpin overall economic growth in the second quarter.

The main reason why growth slowed in the second quarter compared with the first was that businesses were working off excess supplies of goods. That actually subtracted 2.32 percentage points from GDP. In the first quarter, businesses had bulked up their inventories.

The showing for the second quarter was slightly lower than the 3.5 percent pace that economists were forecasting before the release of the GDP report.

The economy’s recovery from the 2001 recession turned out to be weaker than the government previously had estimated, according to new figures — part of comprehensive annual revisions of the GDP data — also released on Friday.

Economic growth averaged 2.8 percent over the last three years, down from the 3.1 percent that originally had been reported for the period.

For all of 2004, the new figures show the economy expanded by 4.2 percent, versus the old estimate of 4.4 percent. Even with the slightly lower growth, last year’s performance was still the best since 1999.

Federal Reserve Chairman Alan Greenspan, in a congressional appearance last week, had mostly positive things to say about the economy’s current performance. Yet he signaled interest rates would continue to move up in an effort to prevent rising energy prices from sparking a broader outbreak of inflation.

Oil prices surged to a new closing high of $61.28 a barrel in early July. Gasoline prices earlier this month set a record of $2.33 a gallon nationwide.

Inflation improves
An inflation gauge tied to the GDP report showed that prices rose at a rate of 3.3 percent in the second quarter, compared with a 2.3 percent growth rate in the first quarter.

Excluding food and energy, though, prices increased at a rate of 1.8 percent in the second quarter, an improvement from the 2.4 percent pace seen in the first quarter. The moderation in this price measure, which is closely watched by the Fed, suggests the central bank can stick with its measured approach to raising interest rates.

To keep inflation at bay, Fed policy-makers are widely expected to boost interest rates by another quarter-point at their next meeting, Aug. 9. That would mark the 10th increase of that size since the Fed began to tighten credit in June 2004.

Despite high energy costs, consumers still helped to keep the economy moving forward in the second quarter,. They increased their spending at a modest 3.3 percent rate, following a 3.5 percent growth rate in the first quarter.

Consumers boosted spending on automobiles and other big-ticket goods at a 8.3 percent pace in the second quarter, the biggest increase since the third quarter of 2004.

Consumer spending accounts for roughly two-thirds of all economic activity.

Business investment in equipment and software rose at a rate of 11 percent in the second quarter, also helping to support overall economic growth in the second quarter. That was even better than the brisk 8.3 percent growth rate registered in the first quarter.

Spending on housing projects rose at a 9.8 percent pace in the second quarter. That was up from a 9.5 percent pace in the previous quarter and highlighted the booming housing market’s contribution to economic growth.

With the economy on solid footing, the nation’s job market continues to plug ahead. The unemployment rate dropped to 5 percent in June, a nearly four year low, as employers expanded payrolls modestly.

Republicans and Democrats, however, have different opinions on how the job market and the overall economy are doing.

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