The U.S. Commerce Department said Friday that its advance reading on gross domestic product showed the economy expanded at a 3.4% annual rate in April through June, matching economists’ forecasts.

A revision will be issued in a month.

Inventory reductions weighed down GDP, the broadest measure of all goods and services produced in the economy. Businesses cut their stocks by US$6.4 billion after elevating them by $58.2 billion in the first quarter. That drop shaved 2.32 percentage points from second-quarter growth.

Though inventory reductions acted as a drag, they may have also helped by shrinking the trade deficit. U.S. purchases of foreign goods and services fell for the first time in two years, dropping 2.0%.

Exports advanced by 12.6%, the sharpest increase since the fourth-quarter 2003’s 19.1% jump. Because exports outperformed imports, trade made a positive contribution to GDP for the first time since the third quarter of 2003, adding 1.57 percentage points to growth.

Consumer spending, which accounts for about two-thirds of economic activity, rose 3.3%, slightly lower than the 3.5% gain in the first quarter.

Business spending increased 9.0%, after rising 5.7% in the first quarter. Purchases of equipment and software rose 11.0%, after a 8.3% gain in the first quarter. Outlays on structures used in business rose 3.1%, after decreasing 2.0%.

Residential investment rose 9.8% in the second quarter, after increasing 9.5% the quarter before.

Inflation gauges in the report were mixed. The price index for personal consumption rose at a 3.3% rate after climbing 2.3% in the first quarter, while the price index for gross domestic purchases, which measures prices paid by U.S. residents, rose at a 3.2% rate.

Separately, the cost of hiring and retaining U.S. workers grew at a mild pace from April through June as the growth of benefit costs moderated, indicating the job-market recovery isn’t fanning much inflation.

The employment-cost index rose 0.7% in the second quarter of 2005, the same rate as in the first quarter, the U.S. Labor Department said.

While the overall economy slowed in the second quarter, a regional economic survey from Chicago showed better-than-expected growth in July.

The Chicago Purchasing Management Index, a leading indicator for manufacturing growth across the country, rose to 63.5 in July on a seasonally adjusted basis from 53.6 in June. A reading above 50 indicates expansion in the manufacturing sector.

Today’s positive economic reports make it likely that that U.S. Federal Reserve Federal Reserve will continue to raise interest rates, at least for the next few meetings.

The Fed next meets Aug. 9, and is widely expected to raise the U.S. benchmark interest rate by a quarter percentage point to 3.5%.

Meanwhile, the University of Michigan’s consumer sentiment index for July came in at 96.5, slightly higher than the June reading and in-line with analysts’ expectations.