The pace of U.S. economic growth softened more sharply than expected in the second quarter and corporate profits rose feebly, according to a Commerce Department report on Thursday that pointed to a significant easing in expansion.

Gross domestic product or GDP that measures total economic activity within U.S. borders advanced at a revised 2.6 percent annual rate, down from the 2.9 percent estimated a month ago and less than half the first quarter's 5.6 percent rate.

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Wall Street economists surveyed by Reuters had expected second-quarter GDP to be unchanged at 2.9 percent but the government said inventory building was weaker than first thought and imports of services - which detract from domestic output — were higher.

Prices continued to bubble higher.

An inflation gauge favored by the Federal Reserve — a measure of personal consumption spending that excludes food and energy items — rose at a revised 2.7 percent rate instead of 2.8 percent reported a month ago. But that was still well above the first quarter's 2.1 percent and was the highest rate since 2.8 percent posted in the first quarter of 2001.

A cooldown in housing sales and prices is affecting the overall economy and it showed clearly in the GDP statistics. Investment in residential structures tumbled at the sharpest rate in more than a decade — down a revised 11.1 percent instead of 9.8 percent reported a month ago.

It was the third straight quarter in which spending on new housing declined and department officials said it was the biggest quarterly drop since 12.2 percent in the second quarter of 1995.

Corporate profits barely grew by a revised 0.3 percent in the second quarter rather than 2.1 percent that the Commerce Department estimated a month ago. That was a steep plunge from a 14.8 percent rate of profit growth in the first three months this year.

Businesses continued to increase their investment in new operations during the second quarter, but not as strongly as first thought and far less robustly than in the first three months of the year. So-called nonresidential spending was up 4.4 percent instead of the 4.7 percent estimated a month ago and was less than a third the 13.7 percent r ate of growth posted in the first quarter.

The U.S. Federal Reserve has paused in its cycle of interest-rate rises, waiting to assess the economy's performance in coming months, and policy-makers are cautioning that some easing in the pace of growth should be expected.

In an interview with Reuters on Wednesday, Richmond Federal Reserve Bank President Jeffrey Lacker said "growth is going to be a bit below par for a quarter or two, maybe longer, but I'm looking for it to return to potential next year."

Similarly, Kansas City Fed Bank President Thomas Hoenig said on Wednesday night he was anticipating growth will bounce back — but still stay below trend — in 2007 after dipping to an annualized rate in the second half of 2006 of 2.0 percent to 2.5 percent.

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