GDP Up 3.4% in Second-Quarter

Washington, DC, July 27, 2007—GDP in the second-quarter grew at an annual rate of 3.4%, according to the Commerce Department. It was the fastest pace since the first quarter of 2006 and followed a 0.6% gain in the first quarter.

Economists had forecast a gain of 3.2%.

Consumer spending increased 1.3% in the second quarter after a 3.7% gain in the first.

The inflation picture was mixed. The core consumer price index, which excludes food and energy, declined to a 1.4% annual rate in the quarter from 2.4% in the first quarter. On a year-over-year basis,  inflation declined to  2.0%, which is at the high end of the Fed's perceived "comfort zone" on inflation. Headline inflation however accelerated to a 4.3% annual rate, the fastest pace since the fourth quarter of 1990.

Spending on commercial construction projects rose at the fastest pace in 13 years, helping to overcome another drop in homebuilding. Factories ramped up production to fill orders from Europe and Asia that made up for a slowdown in consumer spending. Smaller price increases may be of some comfort to Fed policy makers, who have said inflation is their biggest concern

Real disposable income fell 0.8% annualized in the second quarter, after rising 5.9% in the first quarter. The savings rate was 0.6% in the second quarter, down from 1.1% in the first.

Imports fell 2.6% in the second quarter, while exports rose 6.4%. The trade deficit added 1.2 percentage points to growth.

Government spending increased 4.2% after falling 0.5% in the first quarter. Federal spending rose 6.7%. Defense spending rose 9.5% in the second quarter and nondefense spending rose 1.3%. State and local government spending rose 2.9%. Government spending contributed 0.8 percentage points to growth.

Businesses added $3.6 billion to their inventories after adding only $100 million in the first quarter. The change in inventories added 0.15 percentage points to growth.