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Economy Picks Up the Pace

Revised data show that the second-quarter GDP grew 3.1%.
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Updated from 11:14 a.m. EDT

The nation's economy grew at a stronger-than-expected 3.1% annual pace in the second quarter, thanks to higher consumption, a reduction in the trade gap and an increase in defense spending.

The growth in gross domestic product, which measures the value of all goods and services produced in the U.S., was revised upward from 2.4%, the Commerce Department said. Economists had been expecting 2.9% growth.

"It's obviously good news for stocks and shouldn't hurt bonds either, since the surprise gain came mainly from trade," said Christopher Low, chief economist at FTN Financial, a division of First Tennessee National.

Americans purchased more domestic products than imported goods in the quarter, resulting in a reduction in the trade deficit to $543.6 billion from $553.6 billion. That means the trade gap subtracted 1.2 percentage points from the growth rate, as opposed to the previous estimate of 1.6 percentage points.

"The GDP revision looked picture perfect and really added to the idea that the economy is on a path toward a strong recovery," said Lincoln Anderson, chief investment officer at LPL Financial Services, adding that he expects the economy to grow at an annual rate of 5% in the third quarter.

"The GDP numbers are broadening out now, with the help of consumer spending as well as business spending, which is consistent with corporate earnings moving up the way they are."

Improving Growth Rate

Consumer spending, responsible for about two-thirds of all economic activity, rose at a 3.8% rate, according to the report. The gain was led in part by lower tax rates and rebate checks from the government.

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The GDP price deflator, a measure of price changes, rose at a 0.9% pace in the second quarter, compared with a 1% gain in the original report. The reduction was attributed to an adjustment in the personal consumption expenditures price index, which rose at a 0.7% rate, instead of the 0.9% initially reported.

Earlier this week, the Commerce Department said durable goods orders rose for a second consecutive month in July. Shipments of nondefense goods rose 2.9% in the month.

The Commerce Department will release the final second-quarter GDP report at the end of September. In the first quarter, the economy grew at a 1.4% annualized rate.

"This sets the stage for the second-half strength that everyone has been expecting," Low said. "The market's focus has shifted now to the third quarter and, consequently, to the labor market, which is probably the biggest disappointment left in the economy."

According to a separate report Thursday, initial jobless claims rose more than expected to 394,000 in the week ended Aug. 23, from a revised 391,000 the prior week, the Labor Department said. Economists had predicted 390,000 claims would be filed.

Although the figure stayed below the critical 400,000 mark for the fifth week in the last six, indicating the pace of corporate layoffs is slowing, the four-week moving average rose to 396,250 from 395,750.

"The four-week average is clearly sliding sideways," Low said. "There's no improvement in the labor market, when it was not supposed to play out that way. At some point, production should accelerate, but I've been saying that for three months and it's just not happening yet."

The jobless claims for the prior week were revised higher from 386,000, as expected, after the blackout that hit the Northeast and Midwest kept some 3,000 people from filing the previous week.