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GDP Down From First Quarter

U.S. economic growth slowed sharply in the April-June quarter as export sales to Asia slumped, but American corporations managed to eke out a small rise in profits anyway.

The gross domestic product (the sum of goods and services produced within U.S. borders) increased at a seasonally adjusted 1.6 percent annual rate, the Commerce Department said Thursday. That's down from a torrid 5.5 percent rate during the first three months of the year.

Advance figures for the second quarter, released last month, had put growth at a slightly more modest 1.4 percent rate but the advance remained the smallest in three years.

The trade balance wasn't quite as bad as first thought. Exports fell at a 7.4 percent rate instead of 8 percent while imports surged at a 10 percent rate rather than 11.9 percent.

In its first look at second-quarter profits, the Commerce Department said after-tax earnings rose 0.3 percent to a seasonally adjusted annual rate of $480.5 billion. But they were still 1.5 percent lower than a year earlier.

Profits had fallen in both the final three months of last year and the first three months of this year. Many companies are facing a profit squeeze, pressured to pay higher wages because skilled workers are scarce, but unable to raise prices in the face of competition from Asia.

Inflation remained dormant in the second quarter. A price measure tied to the GDP rose at a tiny 0.8 percent annual rate, the best since 1963.

In addition to trade, the other big factors restraining economic growth were the General Motors strikes, which idled nearly 200,000 workers from early June through late July, and a slump in production of goods for inventories.

Inventories of unsold goods had shot up in the first quarter and factories curbed production to allow some of the backlog to be sold off. This swing in inventories subtracted 2.6 percentage points from the second-quarter growth rate.

But growth remained brisk in many areas. Consumer spending was up at a 5.8 percent annual rate and housing construction at a 14.8 percent annual rate. Businesses increased investment in new equipment, including computers, at an 18.1 percent rate.

All three categories have been fueled by low interest rates, which have been for Americans the silver lining of the Asian downturn. Plus U.S. consumers haven't been hurt much yet by Asia. The nation's unemployment rate in June and July, 4.5 percent, was near a 29-year low.

Government spending rose at a 3.6 percent annual rate, spurred by a rare large gain in military spending.

The various changes left the gross domestic product accumulating at a seasonally adjusted annual rate of $8.44 trillion, in current dollars, during the second quarter.

Written by Dave Skidmore