2nd UPDATE: US Growth Slows, Underscoring Recovery Concerns

(Updates with comment from analysts, details on consumer sentiment and Chicago PMI data and stock market movement)

WASHINGTON -(Dow Jones)- The U.S. economy slowed in the second quarter and the government said the recession was deeper than earlier believed, adding to concerns over the recovery's strength.

The Commerce Department Friday said gross domestic product, or the value of all goods and services produced, rose at an annualized seasonally adjusted rate of 2.4% in April through June. In its first estimate of the economy's benchmark indicator, the government report showed growth was lifted by business investments and exports while consumer spending, a big engine for the U.S. economy, made a smaller contribution to growth.

First-quarter growth was revised to 3.7% from an original 2.7% increase, but growth estimates back to the start of 2007 were revised lower.

Economists polled by Dow Jones Newswires were expecting second-quarter GDP to rise by 2.5%.

U.S. stocks tumbled on the GDP data but retraced those losses after other economic data Friday came in better than expected. The closely watched survey of Chicago area purchasing managers suggested the pace of U.S. business activity accelerated in July and signaled the nation's economy isn't headed to a double-dip recession. The Institute for Supply Management-Chicago said its Chicago Business Barometer jumped to 62.3 in July from 59.1 in June and 59.7 in May. Economists surveyed by Dow Jones Newswires forecast a July reading of 56.0.

The manufacturing sector has been leading the economic recovery. The GDP data Friday showed business spending on equipment and software surged again in the second quarter, rising by 21.9% after a 20.4% climb in the first three months of the year. The figures highlight the contrast in the economy between high company profits and a limp job market that's curtailing consumer spending.

A separate report, the Reuters/University of Michigan consumer sentiment index, had a final reading for July of 67.8, up from a preliminary reading of 66.5. Economists surveyed by Dow Jones Newswires had expected the final July index to increase to 67.2. Still, the reading was way down from the final-June mark of 76.0.

"The economy has lost some steam during the second quarter," said Sung Won Sohn, an economist who teaches at California State University. "The slowdown in consumer spending, which accounts for 70% of the economy, is worrisome. The poor job picture is the Achilles' heel of the economy."

Separately, a new Labor Department report Friday also pointed to the weak economy, with U.S. wages and salaries rising just 0.5% in the second quarter, which met analysts' expectations. High unemployment curbed workers' abilities to push for larger pay packages.

After suffering its worst downturn since the 1930s, the U.S. economy began taking small steps forward about a year ago, helped by the Federal Reserve's slashing of interest rates and other measures by the Fed and government to unlock credit markets. But recent data have raised questions about the recovery's durability. The job market, for instance, remains weak, with almost one in 10 Americans unemployed.

The government revised growth data over the past three years, which showed the economy's exit from its deep slump was weaker than previously estimated. In the final quarter of 2009, for example, GDP rose at an annualized rate of 5.0% as consumer spending didn't grow as much as previously thought. The earlier estimate was that GDP increased by 5.6%.

In the most recent quarter available, consumer spending rose by a moderate annualized rate of 1.6% in April to June. Spending by Americans rose by 1.9% in the first three months of the year. "The post-recession rebound is history," said Bart van Ark, the chief economist for The Conference Board, a research group. "We don't foresee a double-dip, but we do expect growth to slow even more markedly, to a 1.6% annualized rate in the second half of the year."

Fed Chairman Ben Bernanke, who last week said the economy's outlook was "unusually uncertain," has stressed that the strength of the recovery will depend on whether consumers spend and companies invest enough to make up for fading support from the government.

With unemployment still at 9.5% and Americans worried that taxes will need to rise to cut a huge budget deficit, the prospects for these factors remain in doubt. When the Fed meets Aug. 10, officials are widely expected to repeat that they see interest rates staying close to zero for a while and are likely to at least discuss ways in which they could support the economy further.

On Thursday a Fed official warned that deflation is a growing risk for the economy. Friday's report showed price increases continued to move down in the second quarter from already low levels. The underlying inflation rate -- which excludes volatile moves in food and energy prices and is closely watched by the Fed -- increased by 1.1% in the April-to-June period from the previous quarter. That was the lowest reading of the core personal consumption expenditure index since the first three months of 2009 and came after a 1.2% rise in the first quarter of this year.

Other inflation gauges within the government's report were also muted. The overall price index for personal consumption expenditures rose by only 0.1% in the second quarter, slowing sharply from a 2.1% gain in the first quarter. Gross domestic purchase prices rose just 0.1%, after a 2.1% increase in the first quarter. The chain-weighted GDP price index increased by 1.8%, compared to 1.0% in the first three months.

For all of 2009, the government said the U.S. economy contracted by 2.6%, compared to the previously estimated 2.4% decline. In the whole of 2008, GDP was flat, instead of rising 0.4% as previously estimated. In 2007, the world's largest economy expanded by 1.9%, down from an originally reported 2.1% increase.

The Commerce Department's release on GDP can be found at: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

-By Luca Di Leo and Darrell A. Hughes, Dow Jones Newswires; 202-862-6682; luca.dileo@dowjones.com

(Jeff Bater, Howard Packowitz, Donna Kardos Yesalavich, and Kathleen Madigan contributed to this article.)

(END) Dow Jones Newswires

07-30-10 1155ET