Economy shows vigor in Q2, but seen flagging

WASHINGTON Thu Aug 28, 2008 5:43pm EDT

1 of 3. The U.S. economy expanded at a stronger-than-first-reported 3.3 percent annual rate in the second quarter, as consumer spending and net exports were more robust than initially estimated and inventories fell less sharply, a government report showed on Thursday.

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WASHINGTON (Reuters) - Strong exports and consumer spending supported by government stimulus checks drove the U.S. economy up at a solid 3.3 percent annual rate in the second quarter, much faster than first thought, but growth is expected to flag as those factors fade.

The U.S. Commerce Department on Thursday said consumer spending and net exports were more vigorous than initially estimated and that inventories fell less sharply. A month ago, it said U.S. gross domestic product had expanded at a 1.9 percent rate in the quarter.

The upward revision was much sharper than analysts had expected and added to evidence the U.S. economy may skirt the downturn many had forecast as a result of a deep decline in housing markets, tight credit and high energy and food prices.

The data and a drop in oil prices powered a big rally on Wall Street. The blue chip Dow Jones industrial average closed up 212 points, or nearly 1.9 percent. At the same time, the dollar rose and bond prices slipped as money moved into stocks.

"It's clear that the second quarter not only wasn't a recession quarter, it was actually a very robust quarter," said Michael Englund, chief economist for Action Economics in Boulder, Colorado.

GDP had grown at a sluggish 0.9 percent rate in the first quarter after a 0.2 percent contraction in the final three months of 2007. The fourth quarter of last year was the weakest since July-September 2001, when the economy was in recession.

The data did little to alter financial market bets that the U.S. Federal Reserve would hold interest rates steady into next year. The Fed has held benchmark borrowing costs at a low 2 percent since April to bolster the struggling economy.

Many analysts worry that exports and consumer spending, which have buoyed the economy, are likely to taper off in the second half of the year as spending supported by the tax rebate program dries up and weakening global growth and a stronger U.S. dollar crimp demand from abroad.

"This number seems to overstate the underlying strength even though exports are obviously strong," said James O'Sullivan, an economist at UBS Securities in Stamford, Connecticut.

WELCOME LIFT

Consumer spending, which fuels two-thirds of the U.S. economy, grew at an upwardly revised 1.7 percent rate in the second quarter, rather than the 1.5 percent pace first reported.

Meanwhile, exports grew at a 13.2 percent annual rate instead of the 9.2 percent pace initially estimated. In all, a narrowing trade gap contributed more than 3 percentage points to GDP growth.

Housing, however, continued to be a sore spot. Residential construction fell at an annual 15.7 percent pace, slightly more than the 15.6 percent decline reported earlier.

Meanwhile, inventories dipped at an annualized $49.4 billion in the quarter, rather than the $62.2 billion drop first reported, a possible sign that businesses are less pessimistic than believed.

In a separate report, the Labor Department said the number of U.S. workers filing new claims for jobless benefits fell by 10,000 last week, although new claims remained at elevated levels, indicating a weak labor market.

Continued claims -- people remaining on the benefits rolls after drawing an initial week of aid -- hit the highest level since November 2003, although the figure may have been lifted by a program extending the duration of unemployment benefits.

The economy's sluggishness has hit the job market hard. Employers have shed a total of almost half a million jobs this year, and unemployment hit a four-year high of 5.7 percent last month.

(Additional reporting by Alister Bull in Washington and Burton Frierson and Richard Leong in New York; Editing by Leslie Adler)

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