Economy rebounds in second quarter

updated 1:57 p.m. ET July 27, 2007

WASHINGTON - The economy snapped out of a lethargic spell and grew at a 3.4 percent pace in the second quarter, the strongest showing in more than a year. A revival in business spending was a main force behind the energized performance.

The new reading on gross domestic product, released by the Commerce Department on Friday, marked a big improvement from the first three months of this year, when economic growth skidded to a near halt at just a 0.6 percent pace, the slowest in more than four years.

At the White House, President Bush said job growth has been strong and the economy is resilient and flexible. “I want the American people to take a good look at this economy of ours,” Bush crowed.

Stronger spending by businesses and government powered the rebound in the April-to-June quarter. Individuals, however, tightened their belts as they coped with high gasoline prices and the ill effects of the housing slump. The sour housing market continued to weigh on national economic activity in the spring but not nearly as much as it had in previous quarters.

Inflation — outside a burst in energy and food prices — moderated.

Treasury Secretary Henry Paulson called the market volatility a “wake up call” to investors to re-examine their degree of risk.

“What we are seeing is risk being repriced and a different perspective on risk which is healthy,” Paulson said in a CNBC interview. “I think we can use some more discipline.”

The second quarter’s performance was better than the 3.2 percent growth rate economists were expecting. It was the strongest showing since the first quarter of 2006, when the economy expanded at a brisk 4.8 percent annual rate.

Gross domestic product measures the value of all goods and services produced in the United States. It is considered the best barometer of the country’s economic fitness.

“I think the confidence level of companies has come back. That’s why there was a modest pickup in capital spending,” said Ken Mayland, president of ClearView Economics.

Even as the economy picked up speed in the spring, inflation managed to settle down.

An inflation gauge closely watched by the Federal Reserve showed “core” prices — excluding food and energy — rose at a rate of just 1.4 percent in the second quarter. That was down sharply from a 2.4 percent pace in the first quarter and was the smallest increase in four years.

That should help ease some inflation concerns. Fed Chairman Ben Bernanke has said the biggest threat to the economy is if inflation doesn’t recede as policymakers anticipate. Out-of-control prices are bad for the economy and the pocketbook. They eat into paychecks, erode purchasing power and reduce the value of investments.

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