U.S. Second-Quarter GDP Downgraded

By Andrea Hopkins

WASHINGTON (Reuters) - The U.S. economy grew more slowly in the second quarter than first thought amid shrinking corporate profits and higher imports, the government said on Friday in a report that confirmed momentum faltered in the spring.

U.S. gross domestic product — which measures total output within the nation’s borders — expanded at a 2.8 percent annual rate in the second quarter, down from the 3.0 percent pace estimated in the Commerce Department’s first snapshot last month.

The revised growth figure, which matched Wall Street expectations, represented a sharp slowdown from the 4.5 percent clip logged in the first three months of the year and was the slowest rate of advance since the first quarter of 2003.

U.S. Treasury bond prices trimmed early gains, while the dollar initially rose on the news. Analysts said there were few surprises in the report and that the market had already shifted focus to signs of slightly better growth in the third quarter.

"It is exactly as expected," said Ram Bhagavatula, chief economist at the Royal Bank of Scotland Financial Markets. "Consumption was revised up. But really it’s the third quarter that matters now, and the July data show a reasonably strong bounce back. The third quarter will be stronger."

The department said after-tax profits fell 1.2 percent in the April-June period compared with the first quarter. That too was the weakest performance since the first quarter of 2003, when corporate profits tumbled 4.5 percent.

The GDP report confirmed inflation pressures were tame in the quarter, with two closely watched price measures scaled back slightly from initial estimates.

The core price index for consumer spending — a favorite of Federal Reserve Chairman Alan Greenspan that cuts out volatile food and energy prices — gained at an annual rate of 1.7 percent, a downward revision from an originally reported 1.8 percent pace.

Overall, prices rose at a 3.2 percent annual clip, a notch below the first quarter’s 3.3 percent pace and the initial estimate for the second quarter.

The U.S. central bank has moved to forestall an increase in price pressures by raising ultra-low short-term interest rates twice this year, in June and August, and economists expect policy-makers to nudge borrowing costs still higher before the end of the year.

The Commerce Department said the downgrade to the GDP estimate was due to an upward revision to imports — which detract from growth — and a downward revision to exports.

The change had been widely anticipated by analysts after a dramatic deterioration of the U.S. trade position in June. The trade gap blew out to a record $55.8 billion in the month, far higher than had been assumed in the first estimate of second-quarter GDP.

Investment in inventories as well as in equipment and software also received an upward boost, while consumer spending was bumped up to a 1.6 percent gain, well above the 1.0 percent rise seen last month.

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