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WASHINGTON (Reuters) - U.S. economic growth accelerated in the second quarter as solid consumer spending offset the drag from weak business spending on equipment, suggesting a steady momentum that could bring the Federal Reserve closer to hiking interest rates this year.
Gross domestic product expanded at a 2.3 percent annual rate, the Commerce Department said on Thursday. First-quarter GDP, previously reported to have shrunk at a 0.2 percent pace, was revised up to show it rising at a 0.6 percent rate.
"This was a very constructive report and given the supportive domestic economic backdrop, we expect this positive momentum in activity to be sustained in the coming months, providing the Fed with the necessary justification to raise rates this year - perhaps as early as September," said Millan Mulraine, deputy chief economist at TD Securities in New York.
The revision to first-quarter growth reflected steps taken by the government to refine the seasonal adjustment for some components of GDP, which economists said left residual seasonality in the data, as well as new source data.
The report also showed a pick-up in inflation during the quarter, which economists say keeps the Fed on track for its first interest rate hike since 2006. The U.S. central bank on Wednesday described the economy as expanding "moderately" while upgrading its view of the labor market and saying housing had shown "additional" improvement.
A separate report from the Labor Department showed first-time applications for unemployment benefits increased 12,000 last week to a seasonally adjusted 267,000. However, claims remained near their cycle lows.
The dollar rose against a basket of currencies, while prices for U.S. Treasury debt were mixed. Stocks on Wall Street were trading lower.
The economy grew 1.5 percent in the first half compared to 1.9 percent during the same period in 2014. Though second-quarter GDP growth was a bit below economists' expectations for a 2.6 percent rate, the growth composition pointed to firming domestic fundamentals.
A measure of private domestic demand, which excludes trade, inventories and government expenditures, increased at a solid 2.5 percent rate after rising at a 2.0 percent pace at the start of the year.
Growth in the second quarter was boosted by consumer spending as households used some of the windfall from cheaper gasoline in late 2014 and early this year to go shopping. The strengthening labor market also encouraged consumers to loosen their purse strings.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 2.9 percent rate from a 1.8 percent pace in the first quarter. The saving rate fell to 4.8 percent from 5.2 percent.
The economy also got a lift from housing, exports, and state and local government spending. However, the energy sector continued to weigh on growth as it struggles with the lingering effects of deep spending cuts by oil-field companies like Schlumberger (SLB.N) and Halliburton (HAL.N) in the aftermath of a more than 60 percent plunge in crude oil prices last year.
Business investment on equipment fell at a 4.1 percent rate.
Spending on mining exploration, wells and shafts plunged at a 68.2 percent rate, the largest decline since the second quarter of 1986. This category dropped at a 44.5 percent pace in the first quarter. But there are signs that the energy spending rout might be nearing an end.
Data last Friday showed U.S. energy firms added 21 oil rigs last week, marking the third increase over the past 33 weeks. Schlumberger said last week it believed the North American rig count may be bottoming and that a slow rise in both land drilling and completion activity could occur in the second half of the year.
Exports rebounded in the second quarter, despite a strong dollar, while imports rose moderately. That left a smaller trade deficit that added 0.13 percentage point to GDP growth.
While businesses accumulated $110.0 billion worth of merchandise, down from $112.8 billion in the first quarter, inventories are still high and could hurt growth in the third quarter.
The sturdy pace of consumer spending and a rise in oil prices pushed up inflation in the second quarter.
The personal consumption expenditures (PCE) price index rose at a 2.2 percent rate, the fastest since early 2012, after falling at a 1.9 percent rate in the first quarter. Excluding food and energy, prices increased at a 1.8 percent pace.
"The stronger recent core PCE number probably makes this report a little bit hawkish for Fed considerations," said Michael Feroli, an economist at JPMorgan in New York.
Reporting by Lucia Mutikani; Editing by Andrea Ricci