U.S. economy posts solid growth

WASHINGTON The economy enjoyed a strong revival in the spring although growing troubles in housing and credit markets have darkened prospects considerably since then.

The gross domestic product, the broadest measure of economic health, expanded at an annual rate of 4 percent in the April-June quarter, the Commerce Department reported Thursday. That was the strongest showing in more than a year and considerably higher than the 3.4 estimate for growth made a month ago.

The improved performance reflected higher activity in such areas as international trade and business investment, which offset a continued plunge in housing construction.

But that growth could be the best showing for some time as the economy continues to be battered by the worst housing slump in 16 years and a widening credit crisis that has sent financial markets on a roller coaster ride in recent weeks.

“The economy has taken a significant blow from the turmoil in financial markets and the housing downturn, which is intensifying,” said Mark Zandi, chief economist at Moody’s Economy.com.

Many economists said they expected growth to slow to around 2 percent in the current quarter, just half the spring pace, and perhaps dip below 2 percent in the final three months of this year as the impacts from the market turbulence on consumer and business confidence take more of a toll.

But analysts said they still believe the current economic expansion, which will be six years old in November, will be able to avoid a full-blown recession.

“While a recession in the United States is clearly possible, one of the biggest positives going forward is that the rest of the world still looks good, which means we will get continued help from rising exports,” said Nigel Gault, chief U.S. economist at Global Insight.

An improved trade performance, representing higher sales of American products overseas and lower imports, was the biggest factor contributing to the second quarter improvement, adding 1.4 percentage points to the 4 percent growth rate.

Analysts said they also had confidence the Federal Reserve would act in time to ward off a recession by cutting interest rates should current financial troubles intensify.

Federal Reserve Chairman Ben Bernanke triggered a big rally on Wall Street on Wednesday after a letter was released in which he repeated assurances that the Fed was ready to “act as needed” to help the economy. Bernanke is scheduled to deliver a speech on housing and monetary policy at a Fed conference in Wyoming today when he may offer some hints about future Fed rate actions.

The Fed’s next meeting is Sept. 18 and many analysts are predicting the Fed will start cutting the federal funds rate at that time, delivering from two to four quarter-point reductions this year and early next year. The funds rate has been at 5.25 percent for more than a year.

Those cuts would make borrowing cheaper for consumers and businesses and also help to mitigate the payment shock facing 2 million mortgage holders as their adjustable-rate mortgages reset in coming months.

Hopes for a rate cut were increased when the Fed, in a special statement on Aug. 17, aimed at calming financial markets, said the “downside risks to growth have increased appreciably,” indicating it was now more worried about weak growth than inflation.

The Fed is seen as having the leeway to cut interest rates because inflation is easing.