2nd LD Writethru: U.S. economy grows at lower-than-expected rate of 1.2 pct in Q2

The U.S. economy grew at an annual rate of 1.2 percent in the second quarter this year, which is below market expectation, the Commerce Department said Friday.

The gross domestic product (GDP) rose at a 1.2 percent annualized rate after a 0.8 percent increase in the first quarter, it said.

The growth in the second quarter was far below the market expectation of over 2 percent.

Companies were cutting back on their investments and reducing inventories amid uncertainty, while consumer spending remained robust, the Commerce Department said.

Consumer spending, which accounts for more than two-thirds of economic output, expanded at a 4.2 percent rate, the fastest growth since late 2014. It contributed 2.83 percentage points to the GDP growth in the quarter.

However, companies were prudent regarding their investments, which dragged the economy down. Gross private domestic investment went down 9.7 percent in the quarter, subtracting 1.68 percentage points from the GDP growth.

The Commerce Department revised down the first quarter's growth to 0.8 percent from its previous estimate of 1.1 percent.

The price index for personal consumption expenditures (PCE), a Federal Reserve preferred inflation indicator, increased 1.9 percent in the second quarter, compared to 0.3 percent growth in the first quarter.

Excluding volatile food and energy prices, the core PCE price index increased 1.7 percent, while the index grew 2.1 percent in the first quarter.

The Fed kept the federal funds rate unchanged this week, saying near-term risks to the economic outlook have diminished. Many analysts hold that this might indicate that conditions are getting more favorable for further interest rate hikes in the future.

But the lackluster growth report released Friday could be a concern for Fed officials on whether the economy could absorb a further rate hike. Endi