Economy expanded modestly in Q2, but contracted in late 2007 -- Fed not expected to move

There have been few positive data points for the U.S. economy of late, and a modest GDP report is hardly a cause for a celebration, but all things considered, the Federal Reserve, business executives and investors will take it, mixed bag as it is.

The U.S. economy grew at a modest 1.9% pace in Q2, the U.S. Commerce Department announced Thursday, as the world's largest economy received a mild, if temporary, boost from federal tax rebate checks. Still, economists surveyed by Bloomberg News had expected the economy to grow at a 2.4% rate in Q2.

Further, revised Commerce Department data indicates the economy contracted 0.2% in Q4 2007, the first drop in real gross domestic product since the 2001-2002 recession. The U.S. economy grew 0.9% in Q1.

Economist David H. Wang, not a part of the Bloomberg News survey, told BloggingStocks Thursday the Q2 U.S. GDP report is a mixed bag, concerning overall U.S. economic health.

"On the one hand, the 1.9% figure is not that bad. I actually am a little surprised that it was that high, given high energy prices and the pullback in retail sales," Wang said. "On the other hand, you can see in the Q2 data the continued drag of the housing sector's recession, with the Commerce Department now saying the economy contracted 0.2% in Q4. Housing is taking at least 1 percentage point off GDP, probably closer to 1.2-1.3 percentage points, and it's hard to project a sustained recovery without a turnaround in housing, given the sectors it affects."

Meanwhile, inflation inched higher in Q2. The personal consumption expenditure price index increased to a 4.2% annual rate, with core prices, which exclude the often-volatile food and energy component, rising to 2.1%, slightly above the U.S. Federal Reserve's target zone. Few economists expect the the PCE data to influence the Fed at its meeting next Tuesday: the Fed is expected to keep its benchmark, short-term interest rate the same at 2%.