Economic growth sputtered in the spring

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Published: September 30,2010

Tags: economy

WASHINGTON — U.S. economic growth tailed off sharply in the spring and probably isn’t faring any better now.

Gross domestic product — the broadest measure of the economy’s health — expanded at a feeble 1.7 percent annual rate in the April-June quarter, The Commerce Department reported today.

That’s a notch higher than the 1.6 percent growth rate the government estimated a month ago. The slight change was mostly due to a little more spending by consumers than first estimated. Still, that’s not enough to have a major impact on the economy.

The second quarter estimate is a sharp slowdown from a 3.7 percent growth rate logged in the first quarter.

Many economists don’t expect economic growth to improve much during the July-September quarter or in the final quarter of this year. Unemployment — now at 9.6 percent — is expected to stay high or even rise in the coming months.

Americans aren’t spending enough to give companies the kind of confidence in the economy that leads to rapid hiring.

Consumers did boost their spending in the second quarter at a 2.2 percent pace. It was a tad better than the government’s previous estimate of 2.0. But it is still considered lackluster for this point in the recovery by historical standards. Economists think consumers will spend at a slightly slower pace through the rest of this year.

Consumer spending is important because it accounts for roughly 70 percent of economic activity.

In the second quarter, Americans saved 5.9 percent of their disposable income, the most in a year. Before the recession, they saved just 2.1 percent.

The economy is the top issue heading into the congressional midterm elections. Voter backlash could cause Democrats to lose control of Congress.

GDP measures the value of all goods and services produced in the U.S.

The sharp drop off in the second quarter mainly reflected fallout from a bigger trade deficit. A surge in imported goods swamped growth in U.S. exports to other countries. The bigger trade gap that resulted shaved 3.5 percentage points from second quarter growth, the most since 1947.

Another major factor in the economy’s slowdown: Businesses added to their stockpiles of goods at a slower pace in the spring, reflecting concerns about the spending appetites of their customers.

The economy’s growth has to be much stronger than what the U.S. has been logging to lower unemployment. Under one rule of thumb, the economy would have to expand by at least 5 percent for an entire year to drive down the jobless rate by one percentage point.

The Federal Reserve is weighing new action to bolster the economy. One likely step is to buy more government debt. Doing so would be aimed a lowering rates on mortgages, corporate loans and other debt. The Fed’s goal: get Americans to boost their spending, which would strengthen the economy.

Thursday’s report also showed that prices — excluding food and energy — rose at a slower pace in the second quarter. They increased at a 1 percent annual rate. That was down from a 1.2 percent in the first quarter and was the slowest pace since the beginning of 2009.

One of the things that Fed doesn’t want to see happen is for the weak economy to lead to a dangerous bout of deflation, a widespread drop in prices of goods and services, in wages, and in the value of homes, stocks and other assets.

Meanwhile, the GDP report also showed that corporations’ after-tax profits rose at a slower pace in the spring. Less generous profits are likely to make businesses think twice about making big capital purchases or stepping up hiring.

When the government reported in late August that the economy’s growth had slowed to just a 1.6 percent pace, it stoked fears the economy might fall back into a recession. Since then, those fears have receded a bit, with reports showing that sales at retailers and activity at factories are holding up. Nonetheless, with the economy so fragile, it is more vulnerable to being hurt by any negative forces.

For each quarter, the government makes three estimates of GDP. It revises the figures based on more complete data. Thursday’s was the third and final estimate for the second quarter. The government makes it first estimate of the economy’s third-quarter performance at the end of October.

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