Revised Estimate: Economic Growth Slowed to 1.6 Percent in the Spring

August 27, 2010 - 9:21 AM
The economy grew at a much slower pace this spring than previously estimated, mostly due to the largest surge in imports in 26 years and a slowdown in companies' restocking of goods.
Washington (AP) - The economy grew at a much slower pace this spring than previously estimated, mostly due to the largest surge in imports in 26 years and a slowdown in companies' restocking of goods.
 
The nation's gross domestic product -- the broadest measure of the economy's output -- grew at a 1.6 percent annual rate in the April-to-June period, the Commerce Department said Friday. That's down from an initial estimate of 2.4 percent last month and much slower than the first quarter's 3.7 percent pace.
 
The revision follows a week of disappointing economic reports. The housing sector is slumping badly after the expiration of a government homebuyer tax credit. And business spending on big-ticket manufactured items such as machinery and software, an important source of growth earlier this year, is also tapering off.
 
As a result, most analysts expect the economy will grow at a similarly weak pace for the rest of this year.
 
"We seem to be in the early stages of what might be called a 'growth recession'," said Ethan Harris, an economist at Bank of America-Merrill Lynch. The economy is likely to keep expanding, but at a snail's pace and without creating many more jobs. Harris expects the nation's output will grow at about a 2 percent pace in the second half of this year. As a result, the jobless rate could rise from its current level of 9.5 percent.
 
That's "very disappointing relative to a normal business cycle," he said. "Usually you get a bigger bounce back."
 
Still, stock futures rose modestly after the announcement as investors appeared relieved the estimate wasn't lower as some economist had forecast.
 
Investors will now turn their attention to a speech by Federal Reserve Chairman Ben Bernanke, scheduled for 10 a.m., that will address what the Fed may do in response to the weakening economy.
 
The widening trade deficit subtracted nearly 3.4 percentage points from second quarter growth, the largest hit from a trade imbalance since 1947, the government said.
 
The economy has grown for four straight quarters, but that growth has averaged only 2.9 percent, a weak pace after such a steep recession. The economy needs to expand at about 3 percent just to keep the unemployment rate from rising.
 
Business investment in new machinery, computers and software drove much of the growth last quarter, increasing nearly 25 percent.
 
But much of that spending involved the purchase of imported goods. Imports surged 32.4 percent, the most since 1984. That overwhelmed a 9.1 percent increase in exports.
 
Consumers spent a bit more in the second quarter than previously calculated. Their spending rose at a 2 percent annual rate, above the 1.6 percent estimated last month and slightly higher than the first quarter's 1.9 percent. The revised estimate was largely due to higher electricity and natural gas usage, the Commerce Department said.
 
Economists expect many other supports for economic growth to fade. Federal government spending and the housing sector bolstered the economy last quarter, but housing has slumped again and will likely drag growth down in the third quarter. The impact of the federal government's $862 billion stimulus package is also projected to taper off this year.
 
There are few other signs of strength. Even business investment is expected to drop, as a report earlier this week showed that business orders for capital goods fell in July.
 
The government's GDP report measures the economy's output of goods and services and covers everything from autos to haircuts. Friday's report is the second of three estimates the government makes each quarter.