U.S. economic growth in the second quarter was slower than previously thought and consumer confidence sank in August, further reducing prospects of a strong pick-up in output in the second half of the year.

Gross domestic product expanded at an annual rate of 1 percent, the Commerce Department said on Friday, as business inventories and exports were less robust. That was a downward revision of the government's prior 1.3 percent growth estimate.

Separately, the Thomson Reuters/University of Michigan consumer sentiment index fell to 55.7 this month from 63.7 in July. It was slightly better than August's preliminary reading of 54.9, which had been the lowest level since May 1980.

Despite the anemic growth pace in the first half of the year and the sharp erosion of consumer confidence, economists did not believe the economy will fall back into recession.

While confidence indicators have plummeted of late, the most timely hard economic numbers certainly do not suggest that the economy has fallen back into a recession, said Harm Bandholz, chief U.S. economist UniCredit Research in New York.

Instead, we still continue to expect that growth in the second half of the year will accelerate to about 2 percent.

Federal Reserve Chairman Ben Bernanke told a gathering of central bankers from around the globe in Jackson Hole, Wyoming, it appeared that factors restraining growth were more likely of a persistent nature than temporary.

However, he stopped short of signaling further monetary policy action to bolster the ailing economy.

The economy advanced just 0.4 percent in the first quarter. Economists had expected second-quarter GDP to be marked down to a 1.0 percent rate.

The second GDP estimate for the quarter confirmed growth almost stalled in the first six months of this year.

U.S. stocks initially fell sharply on the data and disappointment that Bernanke had not signaled further policy easing, but they subsequently recovered most of the losses. Prices of U.S. Treasuries rallied, while the dollar was little changed.


Economists said the economy was in desperate need of both fiscal and monetary stimulus, but none expected much help from both fronts.

The U.S. central bank is seen as having little ammunition left after cutting interest rates to near zero and injecting massive amounts of money into the economy to boost growth.

At the same time, there is no appetite to increase government spending because of a huge budget deficit.

The economy is on its own, said Christopher Probyn, chief economist at State Street Global Advisors in Boston. We are not going to get a marked acceleration in growth.

The downward revisions to second-quarter growth came as businesses accumulated fewer goods than previously estimated.

Business inventories increased $40.6 billion instead of $49.6 billion, cutting 0.23 percentage point from GDP growth during the quarter.

However, the slow build-up of inventories means goods are not piling up on shelves, which should support growth in the third quarter. Excluding inventories, the economy grew at a 1.2 percent rate.

Output was also curbed by exports, which grew at a 3.1 percent pace instead of 6.0 percent. Imports increased at a 1.9 percent rate rather than 1.3 percent.

That left a slightly wider trade deficit, and trade barely contributed to GDP growth. Trade had previously been estimated to have added 0.58 percentage point to overall output.

The drag from business inventories was offset by growth in consumer spending, which was revised up to a 0.4 percent rate from 0.1 percent. The increase in spending, which accounts for more than two-thirds of U.S. economic activity, was still the smallest since the fourth quarter of 2009.

Business spending was revised to a 9.9 percent rate of increase from 6.3 percent as investment in nonresidential structures and equipment and software was stronger than previously estimated.

But there are fears the recent stock market rout could make businesses a bit hesitant to spend on capital and hiring.

The report also showed that after-tax corporate profits increased 4.1 percent in the second quarter after edging up 0.1 percent in the first three months of the year.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman and Dan Grebler)