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UNSOLD GOODS ACCOUNT FOR ECONOMIC GROWTH

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The U.S. economy expanded at a steady rate in the spring but almost two-thirds of the increase came in a huge buildup of unsold goods, the government said Friday. The new report was likely to further ease inflation fears.

The Commerce Department said that the gross domestic product - the broadest measurement of economic health - rose at an annual rate of 3.8 percent in the April-June quarter.That increase was up a half-percentage point from first quarter growth of 3.3 percent. However, analysts had been expecting a much more sizable advance.

The government said that the pickup in growth was not accompanied by higher inflation pressures. Indeed, an inflation gauge tied to the GDP showed prices rising at an annual rate of just 2.9 percent in the second quarter, down from a first quarter increase of 3.1 percent.

The government also reported today that after-tax profits of U.S. corporations shot up 7.4 percent in the second quarter, more than reversing a 3.5 percent drop in the first quarter. The profits performance matched the gain in the fourth quarter of last year.

A month ago in its initial GDP estimate, the government had put growth in the overall economy at a slightly slower 3.7 percent for the second quarter. Many economists had expected today's revision would boost that figure to 4.2 percent.

Such a sizable increase, which would have been almost 1 percentage point higher than the first quarter rate, would have stirred concerns that the economy was growing too rapidly.

Thus, today's report was likely to be greeted as good news by financial markets who throughout the year have worried that too-rapid growth would force the Federal Reserve to boost interest rates more aggressively and thus increase chances of toppling the economy into recession.

The make-up of economic activity in the second quarter also eased fears of overheating. Of the $49.1 billion annual rate of growth in the economy for that period, almost two-thirds came from a buildup in unsold business inventories.

That huge increase of $30.9 billion was the biggest gain in more than six years. Analysts are forecasting that economic growth will slow dramatically in the second half of this year and much of that forecast is based on a belief that production will slow as companies try to work down the buildup in unsold goods.