Economy grows at a 2.6 percent pace in second quarter, weaker than previously thought

Thursday, September 28th 2006, 8:39 am
By: News On 6

WASHINGTON (AP) _ Economic growth clocked in at a 2.6 percent pace in the spring, even slower than previously thought.

The latest reading on the gross domestic product, released Thursday by the Commerce Department, reinforced expectations that the economy is settling into a spell of somewhat sluggish activity.

The growth rate was weaker than the 2.9 percent figure estimated for the April-to-June quarter a month ago. Many economists were predicting that this estimate would hold and thus there would be no revision to the overall GDP figure.

Gross domestic product measures the value of all goods and services produced within the United States and is considered the best barometer of the country' economic standing.

In other economic news, the Labor Department said new applications filed for unemployment benefits last week dropped by 6,000 to 316,000, close to economists' expectations.

In the GDP report, the government said the downgraded reading for the second quarter was mostly related to less inventory building by businesses. Still, the weakness in the housing sector was vivid. Investment in home building plunged at an annualized rate of 11.1 percent in the spring, the most in 11 years.

The second-quarter slowdown comes after the economy sprinted ahead in the first three months of this year, expanding at a 5.6 percent pace, the strongest spurt in 2 1/2 years.

The economy has shifted into a slower gear due to a number of factors, including the cooling of the once sizzling housing market, the toll of once surging energy prices and the impact of the Federal Reserve's two-year string of interest rate increases.

Economic growth is expected to stay somewhat subdued through the rest of this year.

The National Association for Business Economics is forecasting the economy to expand at a pace of 2.6 percent in the current July-to-September quarter and in the final three months of the year.

With the November elections looming, voters' perceptions of the economy's health may influence their choices at the polls.

President Bush's approval rating on the economy is at 39 percent, according to an AP-Ipsos poll. That remains near his lowest ratings.

In the spring, consumers and businesses alike tightened their belts.

Consumer spending, which accounts for a big chunk of economic activity, rose at a 2.6 percent pace. That was the same as previously estimated but marked a big pullback compared to the first quarter's 4.8 percent growth rate.

Business investment in equipment and software dropped at a rate of 1.4 percent in the spring, slightly less steep than previously estimated but a backslide from the stellar 15.6 percent growth rate in such investment seen in the first quarter.

Companies' profits also lost ground in the spring. One measure of after-tax profits in the GDP report showed that profits rose by just 0.3 percent, down from a 14.8 percent increase in the first quarter.

An inflation gauge tied to the GDP report showed that core prices _ excluding food and energy _ advanced at a rate of 2.7 percent in the second quarter. Although that was down a notch from a previous estimate, it still marked a pickup in core inflation from the first quarter's 2.1 percent pace and shows inflation is still hovering outside the Fed's comfort zone.

More recently, though, there have been signs that inflation pressures are easing as once-surging energy prices have calmed down.

After surging past $3 a gallon in the summer, gasoline prices are now hovering at roughly an average of $2.38 a gallon _ a welcome reprieve.

With the economy slowing and energy prices easing, the Federal Reserve last week held interest rates steady for the second meeting in a row.

Some economists predict the Fed _ which had ratcheted up rates over two years to thwart inflation _ now will stay on the sidelines for the rest of the year.

The second quarter's 2.6 percent pace was the slowest since the final quarter of last year when the economy was reeling from the blows of the Gulf Coast hurricanes.

All told, GDP in the second quarter totaled $11.4 trillion at an annual rate, after adjusting for inflation.