Economy Grows Modestly

The 3.0% gain in gross domestic product for the second quarter was weaker than economists expected

By Beth Ann Bovino

Second-quarter gross domestic product growth rose only 3.0%, much slower than the 3.7% growth rate that the markets estimated. First quarter GDP growth was significantly revised upwards to 4.5% (previously reported 3.9% growth), to provide some good news.

The slowdown in the second quarter was driven by weakness in consumer spending. Personal consumption expenditure growth decelerated to only 1.0%, after a 4.1% increase in the first quarter. Real nonresidential private fixed investment increased 8.9%, up from 4.2% in the first quarter to help offset the slowdown in consumer spending.

The chain price index was up 3.2% from up 2.8% in the first quarter, and the personal consumption index rose 3.3%, suggesting inflationary pressures.

The data are weaker than expected and will certainly keep the Federal Reserve on a measured pace in August, though the uptick in prices will keep policy makers on alert. Both equity prices and bond yields should fall on the weaker-than-expected figures.

Consumer Sentiment Rises

University of Michigan consumer sentiment edged up to 96.7 in July from the 96.0 level seen in the preliminary July reading. The markets expected a flat reading.

Expectations were solely responsible for the gain, climbing to 91.2 from 88.5 seen in June. Present conditions fell to 105.2 from 106.7 in June. Near record high energy prices and terror fears continue to contribute to recent volatility in recent months.

The slight upward trend is driven in part by better labor market conditions. Continued job market improvements should support the upward trend, but renewed violence in the Mideast will cause additional bumps along the way.

Bovino is economist at Standard & Poor's

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