US 2/Q economic slowdown less abrupt than thought

US economic growth during the second quarter of the year was stronger than previously thought, the Commerce Department reported, partly because businesses built up inventories at the strongest rate in four years.

US gross domestic product - the measure of total output within the nation's borders - expanded at a revised 3.3% annual rate in the April-June second quarter.

That was up from a 2.8% rate the government estimated a month ago but still slower than the first quarter's 4.5% rate, and the most sluggish rate of GDP advance since the first quarter of 2003.

With the state of the economy looming large as a factor in November presidential elections, the GDP report represents positive news for President George W. Bush ahead of a debate with Democratic contender Sen. John Kerry, who has criticized lagging job creation and record budget deficits since the Bush administration took power in January 2001.

The GDP figure was the second and final revision to second-quarter performance and handily outpaced Wall Street economists' forecasts for a three percent rate of growth.

Though well down from the first quarter's rate of expansion, it left the economy in better shape than anticipated for a widely forecast pickup in growth in the second half of the year.

Not so bad, really

"It looks like the economy wasn't all that soft in the second quarter," said economist Gary Thayer of A.G. Edwards and Sons Inc. in St. Louis, MO. "Generally, it shows the economy healthy and seeing growth in most categories."

Inflation also was muted, with a favorite price gauge cited by Federal Reserve Chairman Alan Greenspan - the index of personal consumption expenditures excluding volatile food and energy - slowing to a 1.7% annual rate of increase from 2.1% in the first quarter.

The main reason for the second-quarter GDP falloff after a vigorous first quarter was weaker consumer spending, which eased to a 1.6% annual rate - the softest since one percent in the second quarter of 2001 - from 4.1% in the first quarter.

But businesses kept building up inventories strongly, adding to them at a $61.1 billion rate in the second quarter after a $40 billion increase in the first three months of the year.

Financial markets showed only a muted reaction to the data, which is considered backward-looking at this stage. Official figures on third-quarter GDP performance will not be available for another month.

Looking for profits

Commerce Department officials said the pace of inventory-building in the second quarter was the strongest since a $99.3-billion rate of buildup in the second quarter of 2000.

Inventory accumulation can be a sign of potential economic weakness, to the extent that it reflects less consumption, but it also is considered a strength since it keeps factories busy and reflects confidence that spending likely will snap back in future.

A substantial part of the inventory buildup has occurred in the auto sector and the big carmakers already are gearing up for rebates and financing incentives to thin out the stocks on dealer lots.

One positive influence on second-quarter GDP came from a downward revision in imports - which subtract from national output - and greater exports of both US-made goods and services than reported a month ago. Commerce revises the GDP data twice each quarter in part to reflect the latest available data on international trade. (Reuters)