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US economy grew at 2.5% rate in second quarter

US economic growth for second quarter revised upwards
US economic growth for second quarter revised upwards

The US economy grew at a 2.5% annualised rate in the three months from April to June, much faster than previously estimated.

The steep revision was largely because US companies exported more goods and imports declined.

The US Commerce Department said second-quarter growth was sharply higher than the initial 1.7% rate it reported last month. And the growth this spring was more than double the 1.1% rate from January to March.

The improvement in the trade deficit helped offset a weaker government spending.

Economists expect growth will stay at an annual rate of around 2.5% in the second half of the year, helped by steady job gains and less drag from federal spending cuts. But some say higher interest rates might restrain the economy's expansion in the second half.

Rates could rise even further if the Federal Reserve decides to reduce its $85 billion a month in bond purchases at its September meeting. The Fed will consider the stronger second-quarter growth when making a decision next month. The bond purchases have helped keep long-term borrowing rates low.

The latest revision to the GDP figures was made after the trade deficit narrowed sharply in June - information that was not available to government analysts produced their first estimate for second-quarter growth.

The additional information left trade neutral in the second quarter, instead of subtracting 0.8 percentage points from growth.

US government spending shrank an annual rate of 0.9% in the second quarter, much worse than the 0.4% drop initially estimated. Spending by the federal government shrank at a 1.6% annual rate, while state and local governments cut at a 0.5% rate.

Two key areas of the economy - housing and business investment - remained strong in the revision to second-quarter growth. Housing construction grew at an annual rate of 12.9%, the fourth consecutive quarter of double-digit growth. Business investment on structures was revised up to at 16.1% rate, although spending on equipment was revised a bit lower.

Consumer spending, which accounts for 70% of economic activity in the US, grew by a 1.8% rate in the second quarter. That is unchanged from the initial estimate but down from a 2.3% growth rate in the first quarter.

Many economists said a key signal of the economy's health in the second half of 2013 will come from Friday's report on consumer spending in July. Consumer spending held up in June, but rising interest rates might have caused it to slow in July.

Long-term rates have risen since Chairman Ben Bernanke said in June that the Federal Reserve could begin trimming its bond purchases later this year if the overall economy and the job market kept improving. Many economists think the Fed will begin slowing its monthly bond purchases to $70 billion or $75 billion.

Others think it will delay any pullback in bond buying to await more data on how the economy is faring in the second half of the year.