The U.S. economy expanded at the fastest pace in more than a year in the second quarter

Thank you Mr. President!

U.S. Economy Expanded 3.8 Percent in Second Quarter (Update3)

By Bob Willis

Sept. 27 (Bloomberg) -- The U.S. economy expanded at the fastest pace

in more than a year in the second quarter, before the sell-off in

credit markets that threatens to hobble growth in the second half.

Gross domestic product rose at a revised 3.8 percent annual rate from

April though June, propelled by a surge in exports, figures from the

Commerce Department showed in Washington. The economy advanced at a

0.6 percent rate in the first quarter.

More recent reports have shown residential construction slumped to a

12-year low in August and manufacturing cooled, suggesting last

quarter's growth rate will be the strongest of the year. Concern over

the damage that a worsening housing recession may wreak prompted

Federal Reserve policy makers last week to cut interest rates more

than most economists forecast.

``We see a pretty dismal outlook given the continued imbalance in the

housing market and tighter credit conditions,'' said Zach Pandl, an

economist at Lehman Brothers Holdings Inc. in New York, who correctly

forecast the figure. ``This number remains largely unaffected by the

credit crunch and even the third-quarter figures will only have a

limited impact.''

The median forecast of 74 economists surveyed by Bloomberg News

matched the revised GDP reading. Predictions ranged from 3.5 percent

to 4.0 percent. Today's report is the last of three estimates of GDP

for the period.

Fewer Claims

The number of workers filing first-time jobless claims unexpectedly

fell last week to a four-month low of 298,000, the Labor Department

said. The decline may help allay concerns about a weakening labor

market.

Treasury securities erased gains after the reports. Yields on

benchmark 10-year notes were at 4.62 percent at 9:18 a.m. in New York,

little changed from late yesterday.

The Fed's preferred inflation measure, which is tied to consumer

spending and strips out food and energy costs, rose at a 1.4 percent

annual rate in the second quarter and was up 2 percent from the same

time in 2006, according to the GDP report.

A Commerce Department report tomorrow is projected to show inflation

has moderated even more. Figures on personal income and spending will

show the price gauge rose 1.8 percent in the year ended in August, the

smallest 12-month gain since 2004, according to a Bloomberg survey.

Less inflation has opened the door for the central bank to cut

interest rates. The policy-making Federal Open Market Committee on

Sept. 18 lowered its benchmark rate to 4.75 percent from 5.25 percent,

the first reduction in four years. Futures prices indicate the Fed

will probably lower the rate to 4.25 percent by the end of the year to

avert recession.

Fed Announcement

The ``tightening of credit conditions has the potential to intensify

the housing correction and to restrain economic growth more

generally,'' the Fed said in announcing its rate decision on Sept.

18.

Today's GDP revision mainly reflected a smaller narrowing of the trade

deficit than previously estimated. Still, the smaller gap added 1.3

percentage points to growth, the most since 1996. Other categories

were little changed.

Declining home construction continued to weigh on growth. Spending on

residential building projects fell at a 12 percent annual pace last

quarter and subtracted 0.6 percentage point from growth.

The housing recession has since deepened as borrowing costs rose and

mortgages became harder to get after defaults on subprime loans

jumped. Builders broke ground on the fewest houses in 12 years in

August and sales of previously owned homes dropped to a 5-year low. A

report later today is projected to show purchases of new homes fell to

the lowest level since 2000.

A Fed report earlier this month showed factory production decreased

last month for the first time since February, suggesting businesses

are scaling back as consumer spending slows.

Spending Slowdown

In today's report, consumer spending, which accounts for about 70

percent of the economy, rose at a 1.4 percent pace, the same as

previously estimated and the smallest gain in a year.

Spending will probably grow at a 2.25 percent average annual pace in

the second half of 2007, compared with a 2.55 percent rate from

January through June, according to the median estimate of economists

surveyed by Bloomberg earlier this month. Quarterly gains averaged 3.7

percent in the last decade.

A softening job market and the turmoil in lending ``set the stage for

a visible spillover of housing weakness into both consumer and capital

spending,'' Ed McKelvey, a senior economist at Goldman Sachs Group

Inc. in New York, said in a report to clients last week. Goldman

lowered growth estimates from the fourth quarter through the end of

2008 as a result.

The economy will grow 2 percent this year, the least since 2002,

according to this month's survey. Economists had projected a 2.5

percent expansion at the start of the year.

Commercial Construction

In addition to trade, spending on commercial construction projects has

boosted growth so far this year. Non-residential building jumped 26

percent, the most since 1981.

Westport, Connecticut-based Terex Corp., a manufacturer of mining

trucks and other heavy machinery, is among companies profiting from

strong global demand and commercial-building projects in the U.S. in

the face of the housing recession.

``The housing part of the North American market, the U.S. market in

particular, is clearly a drag on our industry's business,'' said

Ronald DeFeo, chief executive officer of Terex Corp., in a Sept. 25

interview. ``We have more equipment in the higher end, in non-

residential construction.''

Corporate profits grew 6.1 percent last quarter, the most in more than

a year, to an annual rate of $1.64 trillion, today's report showed.