U.S. economy grows more than forecast

WASHINGTON -- The U.S. economy was even stronger than initially thought heading into the distress in financial markets in August. But economists anticipate a slowdown in the second half of the year as credit troubles weigh on consumer and business confidence and lead to a longer-than-expected housing downturn.

"Enjoy this one while you can, because it won't last," Richard Moody, chief economist at Mission Residential in Austin, said in a note to clients about Thursday's data on economic growth.

Gross domestic product, the broadest gauge of economic activity within U.S. borders, rose 4% in the second quarter at a seasonally adjusted annual rate, the Commerce Department said. That was up from a previous estimate of 3.4% and the biggest gain since the first quarter of 2006.

The increased estimate for the second-quarter GDP was based mainly on new numbers showing stronger gains in exports and business investment than initially thought. GDP in the first quarter was 0.6%, the smallest gain in more than four years.

Economists anticipate the increase in the second quarter will not be matched any time soon, in part because the gain came after such an anemic pace in the first quarter and also because of recent woes in financial markets. In a survey of more than 30 economists conducted by USA TODAY Aug. 20-21, the median forecast was for a 2.4% pace in both the third and fourth quarters, down slightly from their predictions in July.

The data for the second quarter held some positive news that businesses, armed with sharp gains in corporate profits, were expanding before the upheaval in financial markets hit. Corporate profits rose 6.4% in the second quarter from the first quarter, the biggest increase since the beginning of 2006.

While growth in consumer spending was the slowest since the end of 2005, businesses increased their spending at the fastest pace in more than a year. For the first time in more than 12 years, businesses contributed more to GDP growth than consumers did. "We've been waiting a long time for the resurgence in business investment," says Diane Swonk, chief economist at Mesirow Financial in Chicago. "Now we don't want to lose it."