Economic Growth Strengthens in Second Quarter

The U.S. economy is back on track after a horrible start to 2007, according to the gross domestic product report released today by the Commerce Department.

The government said that GDP grew at a 3.4 percent annualized rate in the second quarter of 2007, after an anemic growth rate of 0.6 percent in the first quarter.  The figure for Q1 was the final reading for the quarter and was revised down from the 0.7 percent reported earlier.

The 3.4 percent growth rate was mostly in-line with economists’ predictions.  Reuters, Briefing.com, and Bloomberg all had consensus estimates of 3.2 percent, while Dow Jones-owned MarketWatch had a consensus estimate of 3.6 percent growth from the economists they polled.

While the report was mostly good news, there were some spots of worry for the remainder of the year.

Government spending increased 4.2 percent in Q2 after falling 0.5 percent in the first quarter. Government spending contributed 0.8 percentage points to overall GDP growth. On the Federal side, defense spending increased 9.5 percent and non-defense spending rose 1.3 percent. State and local government spending rose 2.9 percent.

The inflation picture was also mixed. The core price index – which excludes food and energy prices, and is favored by the Fed — retreated to a 1.4 percent annual rate in Q2 from 2.4 percent in Q1. But headline consumer inflation accelerated to a 4.3 percent annual rate, the fastest pace since the fourth quarter of 1990.  The headline figure was driven mainly by record gas prices.