U.S. Economy Slowed to a Tepid 1.5% Rate of Growth
Posted by Ram Kumar Shrestha on July 28, 2012
By SHAILA DEWAN
Growth was curbed as consumers limited new spending and business investment slowed in the face of a global slowdown and a stronger dollar. Several bright spots in the first quarter, including auto production, computer sales and large purchases like appliances and televisions, dimmed or faded away altogether in the second quarter. Growth was not strong enough to drive down the unemployment rate, which has stalled above 8 percent in recent months.
The sluggishness of the recovery makes the United States more vulnerable to trouble in Europe and, at home, the coming expiration of several tax breaks and other buoyant measures known as the fiscal cliff. It also illustrates the election-season challenge to President Obama, who must sell his economic record to voters as the recovery slows.
The lackluster growth in gross domestic productimmediately gave Mr. Obama’s opponents the opportunity to question the federal government’s response to the financial crisis, though a vast majority of economists agree that the stimulus and the bank bailouts saved jobs. The G.D.P. report, released Friday by the Commerce Department, also spurred calls from liberals for the government to do more.
The Federal Reserve, which has lowered its forecasts in recent weeks, is watching the slowdown carefully as it considers further stimulus, though on Friday several analysts said they doubted that new action from the Fed could have much effect.
The pattern for several years now — of hopes raised, only to fizzle — underscored the notion that rebounds after financial busts simply take their own excruciating time.
This year, some of the weakening was to be expected after a spurt of activity during an unseasonably warm winter. A mild rebound is expected in the second half of the year, driven in part by lower gas prices.
But improvement strong enough to provide real traction or lower the unemployment rate remains out of reach. While the economy has not entered a downward spiral in which weakness feeds on itself, wrote Jim O’Sullivan, the chief United States economist for High Frequency Economics, an analysis firm, “There does not appear to be much basis for expecting a significant pickup any time soon.”
In the first quarter, the economy grew by a 2 percent annual rate, according to revised figures. The previous estimate was 1.9 percent.
A slowdown in household spending was the primary damper on growth, as consumers increased their savings rate, a sign of increased uncertainty about the future. State and local governments also continued to cut spending. Exports accelerated in the second quarter despite more recent signs of diminishing demand, but the gain was canceled out by a larger increase in imports, which count against the gross domestic product.
The housing sector, which has gone from a drag on the economy to a net positive, continued to grow, posting a 9.7 percent gain — though again, that is less than half the gain in housing in the first quarter.
Uncertainty cast a pall, coming from both the domestic front, with a presidential race and the fate of numerous federal policies in question, and from overseas, with companies like Ford reporting a decline in profit this week because of the slowdown in Europe, despite a healthy showing in North America.
“You can’t blame all of it on Europe — we have our own problems yet,” said Joshua Shapiro, the chief United States economist at MFR Inc., a financial consulting firm. “When you have a credit bubble or asset bubble that’s popped, the recovery process from that is just really long and really painful.”
Inflation, a measure watched closely by the Federal Reserve as it determines whether to take further action, slowed as well, with consumer prices growing only 0.7 percent compared with 2.5 percent in the first quarter.
The Commerce Department also released updated estimates of economic activity for 2009, 2010 and 2011. Those figures showed that the recession was less deep than it seemed in the most recent reports — though more pronounced than in initial readings — and, as a consequence, that the pace of recovery also appears somewhat slower.
The new estimates show that economic activity fell by 3.1 percent in 2009 and then rose by 2.4 percent in 2010. Last summer, the government reported that activity fell by 3.5 percent in 2009 before rising 3 percent in 2010. The estimated pace of growth in 2011, 1.8 percent, remained basically unchanged. It was previously reported as 1.7 percent.
The revisions, part of an annual process, reflect the imprecise nature of the agency’s work. Its initial estimates are derived from a mix of comprehensive data, samples and educated guesswork, and refined over time. In this case, officials said they had significantly underestimated spending by state and local governments in 2009, and overestimated corporate profits and purchases in 2010.
The agency now estimates average annual growth of 0.3 percent over the three-year period, rather than 0.4 percent.
But the new numbers may modify public perception of two crucial economic trends. It appears that corporations rebounded more slowly from the recession than previously believed. And the more complete data used in the new estimates show that state and local governments increased spending in 2009 before cutting back in the next two years. Officials said they did not have enough information to explain the previously unreported increase, except to say the money was not spent on personnel or on infrastructure projects, the two categories that might have benefited most directly from the federal government’s stimulus programs.
Alan Krueger, the president’s top economic adviser, wrote in a White House blog post that the increase was “consistent with the Recovery Act cushioning the effect of the recession and helping to launch the recovery.”