Economic Picture Improves Slightly

GDP Growth Rate Was Higher Than Estimated

The U.S. economy lost some steam in the spring, but not as much as the government first thought.

Economic growth did slow sharply from April through June, as the housing market cooled and rising energy prices and interest rates pinched consumer spending. The nation's output of goods and services, or gross domestic product, rose at a 2.9 percent annual rate in the second quarter after expanding at a torrid 5.6 percent pace in the first three months of the year, the Commerce Department reported yesterday.

The 2.9 percent annual rate was better than the department's earlier estimate of 2.5 percent, a difference worth $12.3 billion in annual economic output. Commerce economists revise their figures as more data become available, providing a picture of the economy that comes into sharper focus over time.

Financial markets showed little reaction to the new growth estimate, which had been anticipated and did not alter investors' expectations that the economy will continue to slow modestly this year. Nor did it change their bets that the Federal Reserve will hold off on raising interest rates for a while in hopes that the slowdown will weaken inflation.

The report "doesn't change the picture that much," said Eugenio J. Alemán, a senior economist at Wells Fargo Economics. "It just reflects the fact that the increases in interest rates are doing the job" of slowing the economy, he said.

Many Fed policymakers and private economists think the economy is headed for a "soft landing," in which economic growth will slow from an unsustainably rapid pace -- more than 3 percent over each of the past two years -- to around a 2 percent pace through next year. These economists hope that will be slow enough to tamp down inflation without triggering a recession.

But other Fed policymakers and economists are not so sure, worrying that interest rates may be high enough now to slow the economy a bit but not high enough to restrain price increases.

"I'm not that convinced this [slowdown] will be enough to put a lid on inflation," Alemán said, noting rising wages, exports and business spending and still-solid consumer spending.

Inflation quickened in the second quarter, the Commerce Department said. Consumer prices rose at a 4.1 percent annual rate in the spring quarter, or more than twice as fast as their 2 percent annualized increase in the first three months of the year. After excluding volatile food and energy prices, so-called core prices rose at a 2.8 percent rate in the second quarter, up from the 2.1 percent pace in the first quarter.

That's higher than the 1 to 2 percent range for core inflation preferred by several Fed policymakers, including Chairman Ben S. Bernanke.

Much of the improvement in the second-quarter growth figure came from U.S. exports that were stronger than earlier estimated, plus stronger spending on construction of factories, offices and other commercial structures.

Meanwhile, spending on home construction fell more steeply than earlier reported, at a 9.8 percent annual rate from April to June. That was greater than the department's earlier estimate of a 6.3 percent pace of decline in that quarter and far weaker than the 0.3 percent pace of decline in the first quarter.

The second-quarter drop in home building was the largest since the same three-month period of 1995, when it fell 12.2 percent, Commerce Department data show. Such spending has fallen for three consecutive quarters; the last time that happened was in 1994-95.

But consumer spending, which accounts for about two-thirds of the nation's economic activity, also grew a tad more quickly than earlier estimated, at a 2.6 percent annual rate in the second quarter, up from the 2.5 percent pace earlier reported.

That was a sharp slowdown from the first quarter, when consumer spending rose at a 4.8 percent annual rate, but was still reasonably good, Alemán said. "The economy is not going to plunge into a recession."