Economy grows at 5.3 percent rate in second quarter

WASHINGTON - The U.S. economy grew robustly in the spring even as consumer spending - the main engine of growth - rose at its slowest pace in three years. Existing-home sales plunged in July hitting their lowest point in five months as rising mortgage rates turned off prospective buyers.

Both reports, released Friday, provide further evidence that the Federal Reserve's six interest-rate increases over the last 14 months are working to slow consumer spending, which accounts for two-thirds of all economic activity, economists said.

''Consumer spending is slowing sharply as people across the country deal with higher interest on their credit debt, low ready cash in their household savings and a more moderate pace of growth in the stock market,'' said Gordon Richards, economist for the National Association of Manufacturers.

In the April-June quarter, the gross domestic product - the nation's total output of goods and services - rose at an annual rate of 5.3 percent, surpassing first-quarter growth which clocked in at a 4.8 percent rate, the Commerce Department said.

The government's revised reading on GDP - based on more data than its initial calculation - showed the economy growing slightly faster than the 5.2 percent rate estimated one month ago. The revised figure was in line with many analysts' predictions of a 5.4 percent growth rate.

In the current quarter, many analysts believe the economy has slowed to a growth rate of around 3.5 percent to 4 percent.

Bolstering that notion, the National Association of Realtors said, in a second report Friday, that sales of existing homes fell 9.8 percent in July to a seasonally adjusted annual rate of 4.79 million, the lowest level since February. Economists blamed the drop on a spike in the average rate of 30-year mortgages, which hit a five-year high of 8.52 percent in May.

That slowed the number of deals closed in July, said NAR president Dennis Cronk. ''There's always a lag effect when interest rates rise, and we typically don't see the impact for a month or so,'' he said.

On Wall Street, the Dow Jones industrial average closed up 9.89 points at 11,192.63 as traders, no longer preoccupied with interest rates, searched in vain for guidance on the market's direction.

Citing a moderating economy reflecting in part slower consumer demand, the Fed decided Tuesday to leave interest rates unchanged. Still, the central bank left the door open to further rate increases in the future should inflation flare.

In the second quarter, though, inflation pressures actually moderated. An inflation gauge tied to the GDP, and closely watched by Federal Reserve Chairman Alan Greenspan, rose at an unrevised rate of 2.3 percent, down from a 3.5 percent rate in the first quarter.

Separately, Greenspan, in a speech Friday in Jackson Hole, Wyo., pledged to defend globalization while cautioning that opposition to the increased connections between countries would likely gain strength in the event of an economic downturn.

On the GDP front, consumer spending cooled in the second quarter, rising at a 2.9 percent rate, the slowest pace since the second quarter of 1997. In the first quarter, consumer spending surged at a 7.6 percent rate, a 17-year high.

Slower spending dampened growth of corporate profits. After-tax profits of U.S. companies grew by 2.4 percent in the second quarter, down from 5.7 percent in the first quarter.

The slowdown in consumer spending was offset by strong business investment, including spending on computers and other equipment, which rose at an annual rate of 14.6 percent in the second quarter. In the first quarter, such investment rose at a 21 percent rate. Businesses also increased their spending on inventories, adding to second-quarter growth.

Economic growth also was boosted by federal government spending, which rose at a 16.9 percent rate, compared with the first quarter's 14.2 percent rate of decrease.

The U.S. trade deficit continued to be a drag on growth. The bloated deficit subtracted 1.2 percentage points from growth in the second quarter, compared with a reduction of 0.9 percentage points in the first quarter.

In a third report, more banks raised their business lending standards during the past three months, the Federal Reserve said in its quarterly survey of bank-loan officers. About 34 percent of domestic banks reported they had tightened business lending practices somewhat, compared with nearly 25 percent in the previous survey.

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On the Net: The GDP report: http://www.bea.doc.gov/bea/newsrel/gdp200p.htm

Existing-home sales report: http://nar.realtor.com/

Fed web site: http://www.federalreserve.gov/