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Economy grew at solid pace in 2nd quarter

The economy grew at a 3.3 percent annual rate in the second quarter, slightly less than initially estimated but still a solid performance, especially given galloping energy prices.
/ Source: The Associated Press

The economy grew at a 3.3 percent annual rate in the second quarter, slightly less than initially estimated but still a solid performance, especially given galloping energy prices.

The new reading for the gross domestic product (GDP) for the April-to-June, quarter released by the Commerce Department on Wednesday, showed a tad less robust growth than the 3.4 percent pace first estimated for the quarter by the government a month ago.

The slightly lower GDP figure reflected the fact that consumers and businesses spent less briskly than first thought. An improved trade situation also didn’t add as much to economic growth during the quarter as previously estimated.

"The economy was pretty much firing on all cylinders, and the second quarter showed us still on a good growth track ... but oil prices pose a risk to growth and inflation," said Lynn Reaser, chief economist at Bank of America’s Investment Strategies Group.

GDP measures the value of all goods and services produced within the United States and is considered the broadest measure of the country’s economic standing. In the second quarter, GDP climbed to $11.1 trillion on an annualized basis, adjusted for inflation.

Before the release of Wednesday’s report, analysts were predicting that the GDP in the second quarter would be unchanged at the 3.4 percent pace.

In the opening quarter of this year, the economy clocked in at a 3.8 percent growth rate. 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 nearly 2 percentage point from overall GDP in the second quarter.

That paring of inventories, though, sets the stage for replenishing them in the July-to-September quarter, which should help boost economic growth, analysts say.

President Bush wants to see the economy on solid footing, especially as he tries to sell the public his overhaul of Social Security. But his job approval ratings have been sinking in recent polls.

High energy prices remain a wild card for the economy.

Oil prices on Tuesday briefly shot up over $70 a barrel; they moderated a tad to close at a record high of $69.81 a barrel.

Analysts are still predicting economic growth in the current July-to-September quarter will easily exceed a 4 percent growth rate — even with the sting of high energy costs. But growth is expected to slow in the final quarter of this year to around a 3 percent pace or less as the toll of elevated energy prices are more fully felt, analysts say.

Another possible problem for the overall economic outlook is the impact of Hurricane Katrina, which has devastated much of the Gulf Coast area in the South.

Rebuilding efforts will add to economic growth, but analysts have different views on the extent to which that will offset any further run-up in energy prices due to supply disruptions from the hurricane.

To make sure surging energy prices don’t spark a broader outbreak of inflation, the Federal Reserve is expected to boost short-term interest rates by another quarter percentage point at its next meeting, Sept. 20. That would mark the 11th increase of that size since the Fed began to tighten credit in June 2004.

An inflation gauge tied to the GDP report showed that prices rose at a rate of 3.2 percent in the second quarter, up from a 2.3 percent pace in the first quarter.

Excluding food and energy, prices increased at a more moderate pace of 1.6 percent in the second quarter, compared with a 2.4 percent rise in the first quarter. This measure is closely monitored by the Fed and suggests that the central bank can stick to its course of modest, quarter-point rate increases through the year.

Even with the pain of high energy bills, shoppers and businesses still did their part to keep the economy rolling in the second quarter.

Consumers boosted spending at a 3 percent pace. That was slightly less than the 3.3 percent growth rate first estimated for the quarter and down from the 3.5 percent pace registered in the first quarter. Consumer spending accounts for roughly two-thirds of all economic activity.

Businesses increased investment on equipment and software at a 10.4 percent pace. That was down from an initial estimate of an 11 percent growth rate, but up from a 8.3 percent pace in the first quarter.

A measure of corporate profits tied to the GDP report showed after-tax profits rising by 6.9 percent in the second quarter, an improvement from the 0.1 percent dip reported for the first quarter.

Growing profits and good demand from customers despite lofty energy costs are making businesses feel better about hiring.

Employers ramped up hiring in July, adding 207,000 jobs. Economists are forecasting that payrolls expanded by another 190,000 jobs in August, enough to hold the unemployment rate at 5 percent. The employment report for August will be released Friday.