GDP Growth in 2nd Quarter Revised Down

The U.S. economy grew a bit more slowly in the second quarter than first thought as consumers spent less than estimated and imports sated some of their appetite, the government said Wednesday.

Separately, a gauge of business activity in the Midwest slumped in August, contracting for the first time in more than two years and suggesting that the U.S. economy may not be on as firm a path as previously thought as it braces to deal with the fallout from Hurricane Katrina.

Gross domestic product, a measure of all goods and services produced within U.S. borders, grew at a revised 3.3% annual rate in the April-June period after a 3.8% first-quarter gain, the Commerce Department said.

In its first snapshot a month ago, the department had put second-quarter growth at 3.4%, a figure economists had expected to be nudged up to 3.5%.

The report showed businesses built inventories slightly, in contrast to a month ago when inventories were thought to have dropped. Economists said this implied a little less pickup in production ahead for an economy that appears set to take at least a temporary hit from soaring energy prices.

Wall Street reacted to the devastation from the hurricane by trimming their estimates for economic growth in the fourth quarter.

Philadelphia Federal Reserve Bank President Anthony Santomero said Hurricane Katrina and surging energy costs would not knock the economy off the rails, and added that the central bank still needed to move interest rates up.

“It is my view that at the end of the day, these developments may slow the rate at which the economy will grow for a time, but the expansion is strong enough to withstand them,” he said.

Analysts agreed that much of the storm’s economic effect should prove fleeting as activity picks up amid rebuilding, but they warned that uncertainties over how high oil and gasoline prices might soar presented a wild card.

“Our chief concern will be how the third- and fourth-quarter GDP numbers come out in light of the increased cost of energy,” said Arthur Hogan, chief market analyst at Jefferies & Co. in Boston.

The GDP report showed inflation was a bit lower than initially thought in the second quarter, with the price index for consumer spending rising at a 3.2% annual rate, compared with an initial 3.3% estimate.

In addition, the core price index, which strips out volatile food and energy costs, moved up just 1.6%, down from a previously reported 1.8% -- showing that surging oil costs have had little spillover into underlying inflation trends.

The report also offered the first look at corporate profits for the quarter. Profits after tax rose 6.9% after a 0.1% dip in the first quarter. But analysts said profits could take a hit as insurance companies scramble to pay hurricane-related claims.

The revised figures showed consumer spending advanced at a 3% pace, a bit softer than the 3.3% rise first reported. Business investment spending also was a bit weaker, although it still climbed at a healthy 8.4% rate.

The National Assn. of Purchasing Management-Chicago business barometer fell to 49.2 in August from 63.5 in July, its lowest level since April 2003.

Some economists said the report might have been skewed by the heavy presence of automakers in the region, who may be facing softer sales after a gangbuster July. But markets saw it as a potential harbinger of a halt to the series of interest rates rises from the U.S. central bank that dates back to June 2004.