WASHINGTON — Economists are rethinking their projections that the U.S. economy should rebound in the second half of this year following Friday's glum government report that showed weaker than expected growth of just 1.3 percent from April to June.
The anemic numbers reported by the Bureau of Economic Analysis for the second quarter underscored concerns about the sluggish pace of recovery in an increasingly fragile economy. The BEA also revised downward its earlier estimate of growth for the first three months of the year — from 1.9 percent down to only 0.4 percent. All percentages are annual rates.
The new numbers show that the first half of the year recorded the slowest growth since the United States pulled out of recession in June 2009. Those numbers explain why the unemployment rate remains high, at 9.2 percent in June.
“I think the economy should reaccelerate. But the revisions cast some doubt on the strength of reacceleration in the economy, and the economy stalled out in the first half of the year,” said Mark Zandi, chief economist for forecaster Moody’s Analytics. “The damage from the surge in energy prices and other things that weighed on growth was more serious and may make it more difficult to gain traction.”
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The BEA, part of the Commerce Department, also unveiled a revision of data covering the past three years, which showed that the Great Recession was even worse than thought in late 2008 and early 2009.
The weak second quarter report Friday was expected by economists, who warned of drags from high energy prices and spillover effects from the devastating earthquake and tsunami in Japan that disrupted the global supply chain for many manufacturers.
Less expected was the sharp downward revision of growth for the first three months of 2011. That suggests the economy was already slowing before the current political crisis in Washington over raising the debt ceiling and slashing future spending, which surely isn’t boosting confidence during the current quarter, which ends on Sept. 30.
“Since the second quarter of last year, U.S. growth has averaged only 1.6 percent. And while there was a weak ‘bounce back’ from the first to the second quarter of this year, some of the Q2 2011 growth may have been due to one-off factors, such as strong defense spending and a bounce from bad weather in Q1, which will likely not spill over into the third quarter,” Nariman Behravesh, chief economist of forecaster IHS Global Insight, wrote in a note to investors.
He added: “There is little doubt that, since the summer of 2010, U.S. growth has faltered — the only question now is how much weaker could things get and how long will the (very) ‘soft patch’ last. IHS Global Insight now expects that growth in the third quarter will come in much weaker than previously expected — probably less than 2 percent and possibly less than 1 percent. In part, this is due to extreme risk aversion by consumers and businesses in light of the high levels of uncertainty vis-a-vis the debt ceiling extension and fiscal austerity.”
Adding to the grim report, the Reuters/University of Michigan consumer sentiment index was released Friday and showed a drop of 7.8 points to 63.7. That’s the lowest level since March 2009 and underscores why consumers continue to pinch pennies.
The White House didn’t try to sugarcoat the weak GDP numbers.
“This report underscores the need for bipartisan action to help the private sector and the economy grow — such as measures to extend the payroll tax cut and unemployment insurance, pass the pending free trade agreements with re-employment assistance for displaced workers, and create an infrastructure bank to help put Americans back to work,” Austan Goolsbee, the head of the White House Council of Economic Advisers, said in a statement.
“It also underscores the need to end the uncertainty surrounding the risk of default and put in place a balanced approach to deficit reduction that phases in budget cuts, instills confidence, and allows us to live within our means without shortchanging future growth,” Goolsbee said.
If there's any doubt that reductions in government spending weigh against the economy at a time when Republicans in Congress demand deep cuts, the sharp drop in state and local spending continued to be a drag from April through June, falling 3.4 percent, the same as in the first three months of the year. Federal spending was up 2.2 percent after plunging 9.4 percent in the first three months of the year.
Within Friday’s numbers on economic growth, the BEA said that “acceleration in real GDP in the second quarter primarily reflected a deceleration in imports, an upturn in federal government spending, and an acceleration in nonresidential fixed investment that were partly offset by a sharp deceleration in personal consumption expenditures.”
Imports weigh against growth, so their slowdown — from 8.3 percent in the first quarter to 1.3 percent in the second — boosts the nation’s gross domestic product, the broadest measure of U.S. output of goods and services. Exports were also a plus, rising 6 percent in the quarter, although slower than the 7.9 percent pace in the first three months of 2011.
The trade picture was one of the few bright spots in recent economic data. Another came Thursday, when first-time claims for unemployment benefits fell below 400,000 for the first time since April. Economists hope that's a sign the economy is breaking out of its funk.
BEA also unveiled its annual revision of economic data back to 2008. The revision found that in 2008 the economy actually contracted rather than eking out a tiny gain as initially reported, and 2009 growth was almost a full percentage point slower than estimated earlier.
The quarterly percentage change in real gross domestic product was revised down for six of the 12 quarters reviewed. That means the Great Recession, already the worst downturn since the 1930s, was even more damaging that previously recognized.
“The general picture remains the same,” said Steve Landefeld, director of the BEA, who said the known trends were just a bit worse than first projected as more data painted a fuller picture.
The U.S. economy contracted 0.3 percent in 2008, not the flat zero earlier estimated, the BEA said. And in 2009, the U.S. economy contracted by 3.5 percent, not the 2.6 percent estimated earlier. The biggest revisions came in the final three months of 2008 and the first three of 2009 — a period where U.S. banking problems snowballed into a full-blown global financial crisis.
On a brighter note, the BEA revised upward a full 2.1 percentage points the quarterly percentage change for the period of April to June 2010, to 3.8 percent. That shows the economy was on strong footing last year before beginning to sag again late last year.
In a development that could affect the coming debate over changes to the tax code, corporate profits were revised upward handsomely for both 2009 and 2010. Profits from current production in 2009 were revised up $104 billion, or 8.3 percent higher than earlier estimates, while 2010 estimates were revised upward by $175.3 billion, or 10.8 percent.
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