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.

Gross domestic product expanded at a 2.4 percent annual rate, the Commerce Department said in its first estimate on Friday, after an upwardly revised 3.7 percent growth pace 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 a 2.7 percent rate for the first three months of this year.

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, managing director of financial strategies at Madison Williams & Co. in Houston.

A second report showed business activity in the nation's Midwest region expanded more than expected this month on strong orders. The Institute for Supply Management-Chicago business barometer rose to 62.3 from 59.1 in June and above market forecasts for reading of 56.5.

Separately, consumer sentiment dropped this month to a nine-month low, according to Thomson Reuters/University of Michigan's Surveys of Consumers.

U.S. stocks fell on the growth and confidence data, while prices for safe have government bonds rose. The U.S. dollar fell 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.

The sluggish economy and a 9.5 percent unemployment rate are eroding President Barack Obama's popularity and dimming Democrats' prospects in November's mid-term elections.

A Reuters-Ipsos poll this week showed only a 34 percent approval of Obama's handling of the economy and jobs compared to 46 percent who deemed it unsatisfactory.

This is a sharp decline from early 2009, shortly after he took office, when more than half of those surveyed approved of Obama's handling of the worst financial crisis in decades.


Growth in the last quarter was held back by a 28.8 percent surge in imports, the fastest increase in 26 years, which eclipsed a 10.3 percent rise in exports. The widening trade deficit lopped off 2.78 percentage points from growth, the largest subtraction since the third quarter of 1982.

Outside the trade sector, however, there were some encouraging details in the report. Business investment rose 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.

Economists worried businesses might have taken an overly optimistic view of the recovery, given the pull back in consumer spending. They expect spending to slow down in the coming quarters.

It's good to see they are putting their money into the economy, but just how sustainable are those numbers, said Joel Naroff of Naroff Economic Advisors in Holland, Pennsylvania.

Businesses are making up for lost ground right now. Once they have made up for it and if they are looking at a more sluggish expansion, I think they will slow their investment activity.

Growth during the second quarter was also supported by new home construction, which surged at a 27.9 percent rate after being a drag on GDP in the first quarter, reflecting a spurt in building activity spurred by a popular home-buyer tax credit that has since expired.

The rate of increase was the biggest since the third quarter of 1983. Residential investment had contracted at a 12.3 percent rate in the first quarter.

But there were some areas of concern. The report showed consumer spending was not robust. Consumer spending grew at a 1.6 percent rate in the second quarter after increasing at a revised 1.9 percent pace in the first quarter.

Consumer spending, which normally accounts for 70 percent of U.S. economic activity, had previously been estimated to have grown at a 3 percent rate in the first quarter. Spending added 1.15 percentage points to GDP last quarter.

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.

Stripping out the rise in inventories, which could dampen future production, the economy would have expanded at only a 1.3 percent rate in the second quarter.

Separate reports showed current business conditions in New York City fell in July to its lowest level in 11 months [ID:nNLLTIE6AE], while employment costs in the second quarter rose a mild 0.5 percent as the soft economy kept a lid on wages and benefit costs slowed. [ID:nLLAUIE62P]

(Editing by Neil Stempleman)