US economic growth rate halves in second quarter on weaker profits

US economic growth rate halves in second quarter on weaker profits
By Daniel Pimlott in New York
Copyright The Financial Times Limited 2006
Published: August 31 2006 03:00 | Last updated: August 31 2006 03:00


The rate of US economic growth fell by almost half in the second quarter of this year, although it expanded faster than originally reported, the Commerce Department said yesterday.

Gross domestic product grew at an annualised 2.9 per cent between April and June, higher than the earlier estimate of 2.5 per cent and largely bringing it into line with Wall Street expectations of 3 per cent growth. The economy grew at 5.6 per cent in the first quarter.

The slowdown was driven in part by faltering corporate profit growth, which rose 2.1 per cent after taxes, down from 14.8 per cent growth in the first quarter, and the biggest decline in homebuilding since 1995. Overall growth was lower than in any quarter since the end of 2004.

The Federal Reserve has said it believes a slowing rate of economic growth will help to bring down inflation. On Tuesday, the minutes of the Fed's interest rate-setting committee showed that their August decision to hold rates steady was a "close call".

"This plays into the Fed's preferred path of a soft landing for the economy. The economy isn't falling apart and its showing pretty good growth overall," said Brian Bethune, chief US economist at Global Insight.

However, the current rate of growth, which is above the Fed's estimates for the period, combined with rising labour costs, may mean that the Fed will have to raise rates, analysts said.

"In the later part of the year, if growth hasn't slowed substantially and labour cost pressures remain, the Fed is likely to swing to more tightening," said Ted Wieseman, an economist at Morgan Stanley.

Consumer spending growth was revised upwards by 1 basis point to 2.6 per cent but remained a significant drag on GDP, falling from 4.8 per cent in the first quarter.

GDP was revised upwards on raised estimates of exports, non-residential building, private inventory investment, and state and local government spending. These were partly offset by a downward revision to residential fixed investment.

US stocks rose on the data, with the S&P 500 reaching its highest for three months. Treasury prices gained sharply, with the yield on the benchmark 10-year note falling to its lowest level since March.