US economy exceeded expectations in Q2

The U.S. economy grew faster than initially thought in the second quarter on solid domestic demand, showing fairly strong momentum that could still allow the Federal Reserve to hike interest rates this year.

Gross domestic product expanded at a 3.7 percent annual pace instead of the 2.3 percent rate reported last month, the Commerce Department said on Thursday in its second GDP estimate.

The GDP report, which was released in the wake of a global stock market sell-off, should offer assurance to both investors and cautious Fed officials that the United States was in good shape to weather the growing strains in the world economy. Concerns over slowing economic growth in China sent global equity markets into a tailspin last week, raising doubts that the U.S. central bank would raise its short-term interest rate next month.

Economists polled by Reuters had expected that second-quarter GDP growth would be revised to a 3.2 percent rate.

Underscoring the economy's solid fundamentals, a measure of private domestic demand, which excludes trade, inventories and government expenditures, increased at a 3.3 percent rate, instead of the previously reported 2.5 percent pace. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 3.1 percent rate, rather than the 2.9 percent pace reported last month. Consumer spending got off a to brisk start in the third quarter, with retail sales rising solidly in July.

A strong labor market, cheaper gasoline and relatively higher house prices, which are boosting household wealth, are helping to support consumer spending. The trade deficit was smaller than previously reported, adding 0.23 percentage point to GDP growth. The GDP report also showed after-tax corporate profits rebounded 1.3 percent in the second quarter after declining 7.9 percent in the first quarter. A strong dollar has constrained the profits of multinational corporations.