US economy receives growth boost

Business investment has been strong but for how much longer?

The US economy grew at an annual rate of 4% in the second quarter, a better performance than first thought.

Revised figures from the Commerce Department showed the economy fared much better than its initial forecast of a rate of 3.4%.

The rise, eclipsing the 0.6% growth seen between January and March, was due mainly to strong business investment.

But analysts believe the credit worries caused by the US housing slump will limit growth for the rest of 2007.

"It was nice to see that strong growth in the spring," said Joel Naroff, of Naroff Economic Advisors.

"But that is history and the credit problems and the non-duplicative gains posted in the second quarter imply that the third quarter could be extremely slow."

Fed signal?

The crisis in the US sub-prime mortgage sector has fanned fears that the economy will be held back as banks and other lenders - and thus borrowers - face much tougher market conditions.

There was a significant tightening of mortgage credit that might further slow home buying and put downward pressure on home prices to the detriment of consumer spending John Lonski, chief economist at Moody's Investors Service

"The whole environment of a credit squeeze still exists," said Brian Dolan, head of currency research for Forex.com

Consequently, the stock market failed to be mollified by the second quarter economic data, instead focusing on a very uncertain future.

The Dow Jones index of leading US shares closed down 50.6 points at 13,238.7.

Remaining uncertainty

The upward revision to the second quarter figure - well above analysts' expectations - was driven by robust corporate investment and better-than-expected export figures.

Analysts said the figures were unlikely to deter the Federal Reserve from cutting interest rates next month if it believed the recent market turmoil was likely to last for some time.

"Unfortunately, beginning in early August there was a significant tightening of mortgage credit that might further slow home buying and put downward pressure on home prices to the detriment of consumer spending," said John Lonski, chief economist at Moody's Investors Service.