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GDP misses forecast

Economy's broadest measure slows from first-quarter growth rate, inflation readings well contained.

July 29, 2005: 9:34 AM EDT

NEW YORK (CNN/Money) - The pace of economic growth slowed a bit more than expected in the second quarter, but inflationary pressures remained well in check.

Gross domestic product, the broadest measure of the nation's economy, grew at an annual rate of 3.4 percent in the second quarter, the Commerce Department reported, down from a 3.8 percent growth rate in the first quarter.

Economists surveyed by Briefing.com had a consensus forecast for 3.5 percent growth in the most recent period.

The chain deflator, a measure of prices closely watched by the Federal Reserve and economists, rose at an annual 2.4 percent pace in the quarter, less than a revised 3.1 percent rise in the first quarter and also less than the 2.6 percent increase forecast by economists.

The employment cost index, a separate economic report from the Labor Department that also is watched for signs of inflationary pressures, rose only 0.7 percent in the second quarter, the same as the first-quarter increase and somewhat less than the 0.8 percent rise forecast by economists.

"Although the gain in real GDP came in somewhat below market expectations, the details of the report were much more favorable," said Anthony Chan, senior economist at JPMorgan Asset Management.

"The price deflators within the report remove some of the pressure off monetary policy makers as they prepare to set interest rates high enough to prevent future inflation," he added. "And although this report is not likely to prevent another quarter percentage point hike in rates at the August 9th Federal Open Market Committee meeting, it certainly will support some of the more dovish members of the committee make their case for a less aggressive stance moving forward."

Stock futures and bond prices showed little reaction to the report, as concerns about slightly slower than expected economic growth were balanced by the good news on inflation.

But even with the slowing economic growth and some forecasts of rising energy prices contributing to further slowdowns in the second half, Friday's report marked the ninth straight quarter of GDP growth over 3 percent. That's the longest run with growth above that level since a 13-quarter string from the first quarter of 1983 through the first quarter of 1986.

S&P and Nasdaq futures moved off their highs, and pointed to a mixed or flat open for stocks.