U.S. second-quarter growth strengthens

By Lucia Mutikani

WASHINGTON (Reuters) - The U.S. economy rebounded more strongly than initially thought in the second quarter with a bigger chunk of the growth driven by domestic demand in a bright sign for the future.

Gross domestic product expanded at a 4.2 percent annual rate instead of the previously reported 4.0 percent pace, the Commerce Department said on Thursday.

Both business spending and exports were revised higher, while a buildup in business inventories was smaller than previously estimated - a mix of growth that provides a stronger underpinning for the remainder of the year.

Separate reports showing a second straight weekly decline in the number of Americans filing new claims for jobless benefits and a jump in home purchase contracts also suggested underlying momentum in the economy.

"The economy is in good shape and getting better," said Joel Naroff, chief economist at Naroff Economic Advisers in Holland, Pennsylvania.

While the economy shrank at a 2.1 percent rate in the first quarter, economists expect growth of around 2 percent for the year as a whole, with GDP expanding about 3 percent in 2015.

The dollar firmed against a basket of currencies on the data, but U.S. stocks were down as traders kept a wary eye on Ukraine, which accused Russian forces of entering the country. Prices for U.S. Treasury debt rose as the troubles in Ukraine triggered flight-to-safety bids.

One report on Thursday showed the number of Americans filing new applications for jobless aid slipped 1,000 to a seasonally adjusted 298,000 last week.

In a third report, the National Association of Realtors said its Pending Home Sales index, which leads home resales by a month or two, jumped 3.3 percent to an 11-month high in July. It was the latest sign the housing market recovery was back on track after faltering in the second half of 2013.

Growth in the second quarter was broad-based, with consumer and business spending, exports, homebuilding and even government contributing. Domestic demand rose at its fastest pace in four years, pointing to a recovery that was becoming more durable after the first-quarter's weather-induced slump.

Still, the data was unlikely to lead the Federal Reserve to bring forward the timing of interest rates hikes as slack still exists in the labor market and inflation will likely remain below the U.S. central bank's 2 percent target.

"We still have a long way to go. Hence, the Fed remains cautious about how rapidly it will raise rates when they start," said Diane Swonk, chief economist at Mesirow Financial in Chicago.

Economists had expected the second-quarter GDP growth pace would be revised down to 3.9 percent.

RISING INCOME

Gross domestic income, which measures the income side of the growth ledger, surged at a 4.7 percent rate, consistent with strong job gains during the quarter. That was the fastest increase since the first quarter of 2012.

While first-quarter growth in household disposable income was revised down, the second quarter estimate was more robust than previously reported - a good omen for future spending.

At the same time, after-tax corporate profits rebounded from a decline to hit a three-year high, and business spending on equipment and nonresidential structures, such as gas drilling, was revised sharply higher.

The amount of stock accumulated by businesses was a bit less than initially reported, reducing the estimated contribution of inventories to GDP growth to 1.39 percentage points from 1.66 percentage points.

The relatively smaller inventory build means less stock overhang, which bodes well for third-quarter GDP growth.

While trade was a drag for a second consecutive quarter, export growth was raised to its fastest pace since the fourth quarter of 2010.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)