GDP Grows 3.1 Percent in Second Quarter

Soaring defense spending (search) pushed U.S. economic growth in the second quarter to a faster pace than previously thought, the government said Thursday in a report that was the latest in a string of data indicating the economy is on the mend.

Gross domestic product, or GDP (search), grew a revised 3.1 percent in the second three months of the year, the Commerce Department said - a figure broadly in line with Wall Street expectations for a 3.0 percent gain. That was up from the 2.4 percent rise estimated a month ago and followed anemic 1.4 percent growth in each of the two prior quarters.

It was the fastest expansion since the third quarter of last year and is likely to bolster hopes for strong growth in the current quarter.

"The GDP numbers were very favorable and showed strong momentum and growth in some key areas," said Paul Ferley, assistant chief economist at Bank of Montreal.

"There were upward revisions for consumer spending and business investment, with the offset being the rundown in inventories."

Spending on defense, much of it to pay for the U.S.-led war in Iraq, surged 45.9 percent, up from the 44.1 percent estimated a month ago. This was the strongest gain since the third quarter of 1951, during the Korean War (search).

In a sign that business confidence is returning, nonresidential spending - the broadest category of investment - rose 8.0 percent in the spring quarter, up from the 6.9 percent reported a month ago, after a drop of 4.4 percent in the first quarter. Business investment, touted as a key to economic recovery, has lagged since the 2001 recession.

Consumers, who fuel two-thirds of national economic activity, were also in a buoyant mood with consumer spending rising 3.8 percent.

The dollar rose slightly against other currencies in reaction to the GDP number.

Businesses cut back on inventories at a $20.9 billion annual rate in the second quarter after building them up at a $4.8 billion rate in the first quarter of the year. Lean inventories are generally considered a promising sign, since it means companies may have to ramp up production to keep up with demand. This in turn can lead to a pick up in hiring.

The GDP report follows consumer confidence numbers for August, and durable goods and home sales numbers for July, all signaling the economic recovery is on track.

Dallas Federal Reserve President Robert McTeer said last week he expects growth in the current quarter to pick up momentum. He said he saw the economy expanding at least 3.5 to 4 percent in the third quarter.