U.S. economic growth at the fastest pace in more than a year

Inflation the lowest in 4 years.

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U.S. Economy: Expansion Was Faster Than Estimated (Update2)

By Courtney Schlisserman

Aug. 30 (Bloomberg) -- Surging exports and business spending propelled U.S.

growth to the fastest pace in more than a year before turmoil in the credit

markets forced the Federal Reserve to warn of a bleaker outlook.

Gross domestic product rose at a 4 percent annual rate in the second

quarter, the Commerce Department said in Washington, up from an initial

estimate of 3.4 percent. The median forecast of economists polled by

Bloomberg News was 4.1 percent.

The figures may be the peak of the expansion for this year as the cost of

borrowing increased in August and the Fed said that risks to growth

``increased appreciably.'' In a sign that the job market is weakening, the

Labor Department said today showed claims for unemployment benefits climbed

to the highest level since April. A further report showed house prices in

the second quarter rose at the slowest pace in a decade.

``The underlying economy was growing in the first half,'' said Peter

Kretzmer, a senior economist at Banc of America Securities LLC in New York.

``We expect it to slow modestly, but not in such a pronounced way. It will

slow enough, though, that the Fed will find an excuse'' to reduce interest

rates, he said.

Kretzmer accurately predicted the pace of expansion.

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

and strips out food and energy costs, rose at a 1.3 percent annual rate. The

pace of increase was the slowest in four years.

Treasury notes remained higher after the reports. The yield on the benchmark

10-year note declined 4 basis points to about 4.53 percent at 11:51 a.m. in

New York. A basis point is 0.01 percentage point.

Trade Deficit

A bigger jump in exports and smaller gain in imports contributed to a

reduction in the trade deficit, the report on gross domestic product showed.

Trade contributed 1.4 percentage points to growth, the most since 1996.

Spending on corporate construction projects and new equipment also boosted

growth. Commercial construction jumped 28 percent, the most since 1981.

Investment in equipment increased at a 4.3 percent pace, almost double the

previous estimate.

Inventories, which were forecast to play a role in the projected increase in

growth, were little changed from the initial GDP estimate published in July.

Jobless Claims

Initial unemployment claims climbed by 9,000 to 334,000 in the week that

ended Aug. 25, the Labor Department said today in Washington. The four-week

moving average, a less volatile measure, increased to 324,500 from 318,250.

Help-wanted advertising in American newspapers fell in July to the lowest

level since 1958, and online job postings also declined. The Conference

Board's index dropped to 25 last month, matching analysts' forecasts, from

26 in June. The trend in the help-wanted measure has fallen since 2000 as

print media have been losing advertising to the Internet.

The deepest housing slump in 16 years is prompting builders and

mortgage-lending companies such as American Home Mortgage Investment Corp.

to fire workers. That may weigh on consumer spending, which accounts for

more than two-thirds of the economy.

``Business psyche is being more and more affected by what's been going on in

the credit markets,'' said Zoltan Pozsar, a senior economist at Moody's

Economy.com in West Chester, Pennsylvania. ``If this continues for the next

few weeks, it'll definitely be a sign that hiring is being affected by the

credit-market problems.''

Home Prices

Prices for previously owned single-family homes rose an average of 3.2

percent from a year earlier, the smallest gain since 1997, the Office of

Federal Housing Enterprise, said today in Washington. Prices gained 0.08

percent from the first quarter, the slowest since a decline in the final

three months of 1994.

About 14 percent of banks raised standards for mortgages to their most

creditworthy borrowers and 56 percent made it more difficult for people with

limited or tainted records to get loans, according to a Federal Reserve

survey of senior loan officers in mid-July.

In highlighting risks to growth, policy makers reversed their stance from

their last meeting on Aug. 7 that inflation was the biggest risk to the

economic expansion.

Traders and economists expect the Fed to lower its benchmark overnight

lending rate between banks at or before policy makers next meet on Sept. 18.

Chairman Ben S. Bernanke will discuss housing and monetary policy tomorrow,

when he addresses the Kansas City Fed's annual symposium in Jackson Hole,

Wyoming.

Residential Construction

Declines in residential construction subtracted 0.6 percentage point from

growth in the second quarter, more than previously estimated.

Housing will probably deduct about a percentage point from GDP at least

through early 2008, according to economists at JPMorgan Chase & Co.

As a result, growth will average 2.25 percent in the six months starting in

October, a percentage point less than previously projected, Bruce Kasman,

JPMorgan's chief economist, said in a note to clients last week.

Lehman Lowers Forecast

Lehman Brothers Holdings Inc. lowered its forecast last week for the period

covering October through June 2008 to 1.8 percent, almost a half percentage

point less than previously thought.

In one of the earliest economic readings to cover August, consumer

confidence dropped by the most in two years, the Conference Board said this

week. The measure retreated to 105 this month and the share of people who

said jobs are plentiful declined.

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

the economy, was revised up to an annual rate of 1.4 percent from an initial

estimate of 1.3 percent. The gain was still the smallest in a year.

``Our consumer is impacted obviously because they see the value of their

homes go down, there's a sort of wealth effect,'' Farooq Kathwari, chief

executive officer of Ethan Allen Interiors Inc., said in an interview on

Aug. 28. ``Yet they're still interested in furnishing their homes, they're

still buying.''

Today's GDP report included a first look at corporate profits for the

quarter. Earnings adjusted for the value of inventories and depreciation of

capital expenditures, known as profits from current production, rose 6.4

percent, the most in more than a year, to an annual rate of $1.65 trillion.

Compared with a year earlier, profits were up 4.5 percent.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aP3CFLmKC2CQ&refer=worldwide

Taylor wrote:

> Inflation the lowest in 4 years.

> __________________________________________________

>

> U.S. Economy: Expansion Was Faster Than Estimated (Update2)

That's what happens when you artificially blow bubbles.

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