Jul 30, 4:56 PM EDT

US economy delivers solid Q2 growth, rising inflation as Fed moves toward rate hike

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WASHINGTON (AP) -- The U.S. economy isn't moving at warp speed, but it looks like it will be strong enough to handle an expected interest rate increase later this year.

Fueled by solid consumer spending, Thursday's report on the gross domestic product underscored the steady growth that is likely to bolster the Federal Reserve's case that it will soon be time to make a move, perhaps in September.

The economy's total output of goods and services rebounded to a respectable annual rate of 2.3 percent in the April-June quarter, the best showing since last summer. Moreover, the first quarter managed to grow a slight 0.6 percent, reversing an earlier government estimate of a contraction.

"The fact that the economy improved meaningfully in the second quarter and is likely to strengthen further in the current quarter should keep a September rate hike on the table," said Sal Guatieri, senior economist at BMO Capital Markets.

While the latest figures fall short of a boom, the United States appears in better shape than other major economics of the world. China - the world's second-biggest economy - has seen a sharp drop in stock prices recently. Meanwhile, Europe has been consumed with resolving a stubborn debt crisis in Greece.

The International Monetary Fund is forecasting that the 19 nations that use the euro currency will grow a modest 1.5 percent this year. It expects China to expand 6.8 percent, which would be the slowest growth rate for the country in 25 years.

In the United States, economists are hopeful that the 1.5 percent average growth from January through June will double in the second half of this year to around 3 percent.

The optimism stems from projected trends in consumer spending, which should strengthen further in coming months thanks to robust job gains. Unemployment hit a seven-year low of 5.3 percent in June, but the Fed says it wants to see more. It remains concerned about wage growth and the number of part-time workers unable to find full-time jobs.

The Fed also needs to be convinced that price gains will eventually rise toward its target of 2 percent a year. Inflation has been running well below that level for some time, a situation that policymakers view as a sign of a still-weak economy.

The GDP report did offer some encouragement on the inflation front. A price measure tied to GDP rose at an annual rate of 2.2 percent in the second quarter. Excluding food and energy costs, the price index rose by 1.8 percent, up from 1 percent gains in the two previous quarters.

While the GDP report provided support for the Fed's march toward higher rates, economists cautioned that a hike at the Sept. 16-17 meeting is by no means a certainty. It will depend largely on incoming data between now and then, including two jobs reports and a revision to Thursday's GDP estimate.

"Data over the next two months retain their primary position in the decision process," said Joel Naroff, chief economist at Naroff Economic Advisors.

The Fed noted in its post-meeting statement Wednesday that the job market, housing and consumer spending had all improved. As expected, it kept a key rate at a record low near zero, where it's remained since 2008.

While many analysts peg September for a rate hike, others aren't so sure.

They contend that it may take longer for the Fed to see the improvements it seeks, delaying the first rate hike until as late as December. Fed Chair Janet Yellen has emphasized in recent appearances that if the economy improves as she expects, a rate increase will happen before the end of this year.

The current recovery from the Great Recession of 2007-2009 has been the weakest of any expansion since World War II. Revised data released separately Thursday showed even more weakness than previously believed. For the three years from 2012 through 2014, growth averaged just 2 percent, down from the previous estimate that the economy turned in average growth of 2.3 percent during this period.

The modest performance has raised concerns that the U.S. economy has entered a period of historically slow growth. The nation's workforce is growing at a weaker pace, and employees are less efficient than before the recession, government data show. Those trends could restrain future economic growth.

In the second quarter, consumer spending, which accounts for 70 percent of economic activity, expanded at an annual rate 2.9 percent. That is a sizable pickup from the 1.8 percent growth in the first quarter.

Trade also served as a small boost to overall growth after subtracting nearly 2 percentage points in the first quarter. Trade in the first quarter was hampered by a labor dispute at West Coast ports and the rising value of the dollar.

Business investment, which has been hurt by a sharp cutback at energy companies, fell at an annual rate of 0.6 percent in the first quarter. That reflected in part a big drop in the category that covers oil and gas exploration activities.

Housing construction was a bright spot, rising at a 6.6 percent rate. The government sector grew at a 0.8 percent rate as gains in spending by state and local governments offset a drop at the federal level.


Associated Press economics writer Christopher S. Rugaber contributed to this report.

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