US Economy Grows at Fastest Pace in a Year

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Economy Surges Ahead at 4 Percent Annual Rate in Spring Despite Housing Troubles

The economy grew at its strongest pace in more than a year during the
spring as solid improvements in international trade and business
investment helped offset weakness in housing.

The gross domestic product, the broadest measure of economic health, expanded at an annual rate of 4 percent in the April-June quarter, significantly higher than the 3.4 percent rate the government had initially estimated a month ago, the Commerce Department reported Thursday.
But the growth spurt could be short-lived. There are concerns that the recent turmoil in financial markets, a result of a spreading credit crisis, could seriously dampen economic activity in the second half of this year.

GDP growth may have slowed to just above 2 percent in the current quarter and many analysts believe growth will slow even further in the final three months of this year as the full impact of the recent market turmoil is felt.

The worry is that the roller coaster ride in stocks and spreading credit problems will shake consumer and business confidence and cause cutbacks in spending and hiring plans.

However, analysts believe the Federal Reserve will act to avert a full-blown recession. If financial turmoil persists, they think the Fed will wield its major policy tool, cutting its target for the federal funds rate, the interest that banks charge each other. That rate has been at 5.25
percent for more than a year, but investors are starting to hope that the
Fed will begin reducing it in quarter-point moves starting at their next
meeting on Sept. 18.

The Fed on Aug. 17 cut a less economically significant rate, its discount rate, and has injected billions of dollars into the banking system in an effort to keep credit markets operating in the face of the turmoil. Federal Reserve Chairman Ben Bernanke may offer hints about the Fed's next policy moves when he delivers remarks at a Fed conference on Friday.

In other economic news, the Labor Department reported that the number of newly laid off workers filing for unemployment benefits rose to 334,000 last week, an increase of 9,000 from the previous week. That gain caught analysts by surprise. They had been expecting a decline of around 2,000.

The Fed is seen as having the leeway to cut interest rates because inflation is easing. A key GDP inflation gauge that excludes food and energy rose by just 2 percent in the second quarter, compared to a year ago. That was better than a year-over-year gain of 2.4 percent in the first quarter.

The 4 percent GDP growth rate for the second quarter marked a sharp jump from the anemic 0.6 percent pace turned in during the first three months of the year. It was the fastest GDP increase since a 4.8 percent growth rate in the first three months of 2006.

Since that time, the economy had slowed sharply, reflecting a major drag from housing, which is in its worst slump in 16 years.

The revision from the initial estimate of 3.4 percent second quarter growth reflected an improving trade deficit, with stronger export sales and fewer imports.

Business investment, in the form of rebuilding of inventories, and construction of shopping centers, office buildings and other non-residential projects was also stronger than previously believed.
Consumer spending, which accounts for two-thirds of total economic activity, did show a marked slowdown in the second quarter, growing at an annual rate of 1.4 percent, less than half the first quarter increase.

Housing construction, which had been a standout performer during five boom years, suffered another drop, falling at an annual rate of 11.6 percent, the sixth straight decline in this industry.
The 4 percent GDP revision was slightly below economists' expectations for a 4.1 percent GDP gain in the second quarter.

All of the changes left GDP, after adjusting for inflation, growing at an annual rate of $11.5 trillion in the second quarter.

JKL

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