Economic growth slowed in the second quarter as companies invested heavily in equipment from abroad and the pace of consumer spending eased, raising concerns about the recovery in the rest of 2010.

The fastest rate of business spending in four years would normally be associated with increased confidence in the economy, but analysts said cash-flush companies were merely making up for ground lost during the recession.

Another factor pointing to anemic growth in coming quarters was a big rise in inventories. Against a backdrop of tepid consumer demand, the increase implied businesses probably have too much stock on their shelves and in their warehouses.

The anticipated slowdown in the economy is happening. Will business investment fall off a cliff next quarter if domestic consumer spending continues to flag? said Lee Olver, head of financial strategies at Madison Williams & Co. in Houston.

Gross domestic product expanded at a 2.4 percent annual rate, the Commerce Department said on Friday, after an upwardly revised 3.7 percent gain in the January-March quarter.

Financial markets had forecast GDP, which measures total goods and services output within U.S. borders, growing at a 2.5 percent rate in the second quarter from a previously estimated 2.7 percent rate for the first three months of the year.

A second report showed manufacturing activity in the nation's Midwest region accelerated this month as orders rebounded strongly, a hopeful sign after a string of data had suggested factory activity was faltering.

Stocks on Wall Street fell on the GDP report, but recouped some losses on the factory report to trade only marginally lower in the afternoon. Prices for safe-haven U.S. government bonds rose, but the dollar touched an eight-month low against the yen.


The economy, which is digging out of its longest and deepest recession since the 1930s, has now grown for four straight quarters. However, growth has been too tepid, making little impact on a high unemployment rate.

Further, the government also published revisions to prior growth data, which showed the downturn was more severe than previously thought.

President Barack Obama, whose popularity has been battered by the sluggish economy and a 9.5 percent unemployment rate, told auto workers in Detroit that more needed to be done to lift the economy.

We've got to keep on increasing that rate of growth and keep on adding jobs so we can move forward, he said.

The poor state of the economy has dimmed Democrats' prospects in November's mid-term elections. A Reuters-Ipsos poll this week found only 34 percent of Americans approve of Obama's handling of the economy. Forty-six percent deem it unsatisfactory.

Worries about jobs pulled consumer sentiment in July to its lowest since November, according to Thomson Reuters/University of Michigan's Surveys of Consumers on Friday.

Consumer spending, the engine of the economy, grew at a modest 1.6 percent rate in the second quarter after increasing at a downwardly revised 1.9 percent pace in the first quarter, the Commerce Department said.

Business investment spending, however, surged at a 17 percent rate, the largest increase since the first quarter of 2006, after a 7.8 percent pace during the prior period.

Spending on equipment and software posted its strongest growth since the third quarter of 1997, while investment on structures rose for the first time since the third quarter of 2008, likely boosted by a rise in oil and gas drilling.

Businesses are making up for lost ground right now. If they are looking at a more sluggish expansion, I think they will slow their investment activity, said Joel Naroff of Naroff Economic Advisors in Holland, Pennsylvania.

New home construction, which grew at the fastest pace since the third quarter of 1983, also supported the rise in GDP but that reflected a spurt in building activity spurred by a popular home-buyer tax credit that has since expired.


While business spending shot forward, imports satisfied that demand and acted as a brake on U.S. output.

Imports grew at a 28.8 percent rate, the biggest rise in 26 years and a gain that eclipsed a 10.3 percent increase in exports. The widening trade gap lopped off 2.8 percentage points from growth, the most since the third quarter of 1982.

With so much domestic demand sated by overseas production, U.S. businesses found stocks piling up on their shelves. Inventories increased $75.7 billion in the second quarter after a $44.1 billion rise in the first three months of the year.

That suggests scope for additional contribution to growth from inventories through the second half of this year is probably about over, said Keith Hembre, chief economist at First American Funds in Minneapolis, Minnesota.

Stripping out the rise in inventories, the economy expanded at only a 1.3 percent rate in the second quarter.

Consumer confidence, personal income and labor indicators don't really provide a picture that would suggest the real final sales category is likely to accelerate in a material way, said Hembre.

What you're going to see is GDP numbers migrate down to that underlying trend in real final sales which is pretty modest, between 1 and 2 percent.

(Additional reporting by Ann Saphir in Chicago and Richard Leong in New York; Editing by Andrea Ricci)