NEW YORK (CNN/Money) -
The economy grew at a 3.3 percent annual rate in the spring, the government reported Wednesday, stronger than its previous estimate and ahead of forecasts on Wall Street.
Growth in gross domestic product (GDP), the broadest measure of the nation's economic activity, had previously been estimated at a 2.8 percent rate for the second quarter. Economists surveyed by Briefing.com had forecast the final GDP reading for the quarter would come in at 3 percent.
The report suggests that the economy ended the first half of the year stronger than previously suggested. But despite the upward revision, second-quarter growth still lagged the first quarter's 4.5 percent pace, and was the slowest since the first quarter of 2003.
Since the end of June there has been growing talk of a "soft patch" or slow down in the economy. And many economists say even though the third quarter ends Thursday, it's too soon to give a firm estimate on where third quarter and fourth quarter GDP will land.
Most estimates now stand between 3.0 and 4.0 percent growth in the third quarter, with a similar range in the fourth quarter estimates. Some economists won't even give a range of estimates yet for the last two quarters of the year.
"We don't see any significant deceleration yet, but we don't see any acceleration anywhere in sight," said Anirvan Banerji Director of Research for the Economic Cycle Research Institute. "Could we go to 3.5 percent growth? Possibly. Could we go to 2.9 possibly? Possibly. But that's not a significant difference. For now it looks like it'll stay around this trend rate for the next quarter or two."
Oil, storms, rate hikes issue for growth
The third quarter has seen a number of major economic events, including the Federal Reserve continuing its policy of interest rate hikes, the rise of crude oil prices to new records and four major hurricanes hitting the Southeast United States, causing tens of billions of dollars of damage.
But economists say even those events' impact on the economy are difficult to gauge given countervailing factors associated with them. The bond yields have actually declined as the Fed raised short-term rates, keeping lending costs low for homeowners and some businesses, and gasoline prices have actually retreated from record levels in the second quarter despite the run-up in crude prices.
Four major hurricanes disrupted businesses and destroyed wealth in large sections of the country. But insurance and federal assistance could pump money into the economy that otherwise would not have been seen in the period.
Robert Brusca of FAO Economics is looking for about 3.5 percent growth in the second half of the year, with about 3.2 percent growth in the third quarter and 3.7 in the fourth quarter. But he says he could see growth coming up short of those targets due to factors like oil prices and Fed interest rate hikes.
"We've already got some weakness," he said. "Consumer confidence is beginning to falter a little bit. Job growth just hasn't turned on yet. I think all the risk is on the downside."
But Steven Wieting, senior economist at Citigroup said he believes growth in both the third and fourth quarters will be in the 3.75 to 4.0 percent ranges. He said one factor helping growth pickup is that inflationary pressures seen in the second quarter have retreated. The GDP growth rate is adjusted for the impact of inflation.
Part of the upward revision occurred because businesses built inventories at the strongest rate in four years during the quarter, according to the Commerce Department report.
There was also a downward revision to imports and an upward revision in exports. Higher imports subtract from GDP while higher exports boost it.
The increase in inventories can be read two ways. If they rose because production is outstripping demand, that could point to coming weakness in the economy. But if the gain was from businesses building their stockpiles of goods in anticipation of greater sales, it can be a sign of growth to come.
"On balance, I think it's the latter," said John Silvia, chief economist at Wachovia Securities. "In most businesses, inventories are in line with sales expectations."
Wachovia's forecasts for the quarter, which ends Thursday, is growth of 3.5 to 4 percent. Silvia cited gasoline prices that were lower than they were in second quarter, which helped put money back in consumers' pockets. Consumer spending fuels two-thirds of the nation's economy.
But the runup in crude oil prices in recent weeks could hit fourth-quarter GDP, especially if gas and heating oil prices rise sharply. Wachovia's forecast is for GDP growth of 2.5 to 3.0 percent for the last three months of the year. But Silvia said forecasts that far out are difficult, particularly this year.
"You're getting a little volatility in numbers due to oil prices, discounts in autos and the impact of hurricanes," he said.
On Wall Street, Treasury bond prices fell, sending the yield on the 10-year note up to 4.10 percent, from 4.02 percent late Tuesday, as the GDP report confirmed investors' belief that the Federal Reserve will raise its short-term interest rate target again in November. Bond prices and yields move in opposite directions.
A much weaker-than-expected GDP number might have raised the chance that the Fed, the nation's central bank, would pause on its path of measured rate hikes.
Stock prices were little changed other than tech issues, which were helping to lead the Nasdaq higher.
The GDP report's impact on financial markets was limited, as it looked back rather than forward, where investors tend to focus.
-- from staff and wire reports
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