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US 2nd qtr growth revised upward to 3.3 percent

WASHINGTON - The U.S. economy grew at a solid 3.3 percent annual rate in the second quarter, much stronger than first thought, but many economists expect growth to flag as the year progresses.

The U.S. Commerce Department on Thursday said consumer spending and net exports were more robust that initially estimated and that inventories fell less sharply. A month ago, it had said U.S. Gross Domestic Product had expanded at a 1.9 percent rate in the quarter.

Analysts polled by Reuters were expecting the annual rate to be revised to 2.7 percent.

U.S. equity index futures rose and the dollar pared losses, while Treasury debt prices fell on the report. Federal funds futures showed increased prospects for interest rate hikes.

"The market is gaining increasing confidence the strain in the financial markets and high oil prices will not tip the economy into a recession," said Jim Awad, chairman of W.P. Stewart & Co. Ltd in New York.

GDP grew at a sluggish 0.9 percent rate in the first quarter after a 0.2 percent contraction in the final three months of 2007. The fourth quarter of last year was the weakest since July-September 2001, when the economy was in recession.

The Federal Reserve has held benchmark interest rates at 2 percent since April to bolster an economy reeling from the deep housing slump, tight credit and soaring energy costs. Growth in the second quarter at close to the level of long-term trends could make it easier for the Fed to raise interest rates to combat troublesome inflation.

However, many analysts worry that exports and consumer spending, which have buoyed the economy, are likely to taper off in the second half of the year as spending from government stimulus checks dries up and weakening global growth and a stronger U.S. dollar crimp demand from abroad.

Consumer spending, which fuels two-thirds of the U.S. economy, grew at an upwardly revised 1.7 percent rate in the second quarter rather than the 1.5 percent pace first reported.

Meanwhile, exports grew at a 13.2 percent annual rate instead of the 9.2 percent pace initially estimated.

In evidence the housing downturn continues to weigh on the economy, residential construction was down by an annual 15.7 percent pace, slightly more than the 15.6 percent decline reported earlier.

Meanwhile, inventories dipped at an annualized $49.4 billion in the quarter, rather than the $62.2 billion drop first reported, a possible sign that businesses are less pessimistic than believed.

Separately, the number of U.S. workers filing new claims for jobless benefits fell by 10,000 last week, government data on Thursday showed, but remained at elevated levels indicating a weak labor market.