U.S. growth falls short of forecasts

In a speech in New York, Paulson acknowledged the country's troubles.

"The housing correction, credit market turmoil and high energy prices remain a considerable drag on the economy," he told the Exchequer Club.

But the Treasury secretary gamely repeated his prediction that the sharp decline in home prices would come to an end relatively soon.

"While home price adjustments will continue for some time, I believe we can move through the bulk of the correction in months, rather than years," he said.

Most economists are nowhere near as optimistic. They worry that the real estate doldrums could take years to play out and are concerned that high energy prices could push the country into a long, deep downturn.

"The economy continues to be very weak," said Sung Won Sohn, an economist at Cal State Channel Islands in Camarillo.

"It is too early to talk about it bottoming out and rebounding. The real danger is of the economy slipping further."

The GDP figures for the second quarter contained some positive news on trade, which made its largest contribution to U.S. growth since 1980. Imports of foreign goods fell at a steep 7% annual rate while exports of American goods climbed at an even steeper 9% pace.

"Trade is the really bright spot in the economy," said Nariman Behravesh, chief economist at Global Insight, a forecasting firm based in Waltham, Mass. "If you took trade out and looked at just the domestic economy, we're in a recession right now."

There was also some hint in the latest numbers that the worst of the housing crunch could be in the past. Although home construction continued to shrink in the April-through-June quarter, it did so at a slower pace.

Investment in residential structures fell at a nearly 16% rate, adjusted for inflation, but that was its smallest decline in a year. Residential investment is down nearly 40% from its 2005 peak.

Overall, analysts said, the economy's performance in the latest quarter was disappointing, boding poorly for the rest of this year and at least the early part of next.

"Whatever strength there was came from the tax rebates, from exports and from strong federal government spending," said Allen Sinai, chief economist with Decision Economics Inc. in New York.

"The economy," Behravesh said, "is in the upward leg of a W-shaped cycle, with the second dip imminent."

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peter.gosselin@latimes.com