Business investment is supporting the economy

The economy grew by 3.4% on an annual basis, bouncing back from a dismal first quarter where it grew just 0.6%.

The figures were keenly anticipated following signs that the slump in the US housing market has been having a negative impact on the wider economy.

The figure exceeded expectations by analysts who expected a 3.2% increase.

The data helped to calm US shares, which had fallen heavily on Thursday.

'We remain strong'

The growth figures were welcomed by President George W. Bush who praised the "resilience" of the economy.

"The world economy is strong and I happen to believe one of the main reasons why is because we remain strong," he said.

Separate figures showed that consumer sentiment has also improved, although a little less quickly than many analysts had predicted.

According to Reuters and the University of Michigan, their consumer sentiment index was 90.4 in July, up from a 85.3 in June.

This report says the economy is OK

Rudy Narvas, 4 Cast Limited

However, the growth figures from the Commerce Department indicated a further deterioration in consumer spending between April and June and continued weakness in the housing market.

The rate of growth in consumer expenditure slowed to 1.3% from 4.2% earlier in the year, reflecting growing caution among households about the economic outlook.

Investment in house building fell 9.3% on an annual basis, although the fall was less severe than the 15.8% decline seen in the first quarter.

General economic activity was boosted by strength in business investment, government spending and rising exports.

At the same time, core consumer prices - excluding food and energy - rose by 1.4% over the period, their slowest quarterly rate of growth since 2003.

Market reassurance

Analysts said the figures should give some reassurance to volatile equity markets.

"There are an awful lot of concerns out there about growth," said Rudy Narvas, a senior bond analyst from 4 Cast Limited.

"This report says the economy is OK."

But Capital Economics said it did not expect the past quarter's growth rate to be sustained and that annual growth would not be higher than 2%.

The US Federal Reserve is anticipating somewhat stronger growth in the second half of 2007 but has still revised downwards its full-year growth forecast to between 2.25% and 2.5% after the slowdown earlier this year.

The Fed has kept interest rates on hold at 5.25% for several months as it balances concerns over the extent of the housing slump with signs that inflationary pressures may be easing.