Steep decline in US GDP causes alarm

U.S. economic growth slowed sharply in the spring, stoking concerns about a weak job market, a drawn-out struggle for the unemployed and growing financial pressures on millions of American families.

The nation’s gross domestic product grew at an annualized rate of 2.4% in the second quarter, falling from an upwardly revised 3.7% expansion in the first three months of the year, the Commerce Department said Friday.

While many economists had expected growth to moderate, the reported decline was a jolting 35% below the previous quarter. Gross domestic product is the value of all goods and services produced in the economy.

Underlying the government’s report was an unusual economic crosscurrent: Corporate America is flourishing, investing heavily on new computers and other equipment. Meanwhile, many consumers are cutting their spending as they try to pare debts in the face of weak income gains, high unemployment and a shaky housing market.

“The consumer is still very tepid, but businesses are humming along,” said Shawn DuBravac, chief economist for the Consumer Electronics Assn., referring generally to large companies. “But this disconnect,” he added, “can only happen for a finite period of time.”

In other words, if consumers don’t step up their spending — which accounts for 70% of the American economy — businesses won’t be investing much more for very long.

“It’s difficult to have a strong sustained recovery without households coming to the party,” said Paul Ashworth, senior U.S. economist at Capital Economics in Toronto.

Consumer spending rose a meager 1.6% in the second quarter, down from 1.9% in the first three months of the year, according to the Commerce Department.

The nation’s large trade deficit was another major factor in the latest GDP slowdown.

“It’s not very promising,” said Mark Vitner, a senior economist at Wells Fargo in Charlotte, N.C. Like other analysts, he sees slower growth ahead as government stimulus spending fades and companies reduce the rate at which they had been rebuilding their inventories.

Some technology companies already have reported that they have plenty of merchandise on hand and won’t be restocking until consumers spend more freely, Vitner and others said.

In the wake of Friday’s report, a number of economists downgraded their growth forecast for the second half of the year to as low as 1.5%, an anemic rate that would likely push the unemployment rate above June’s 9.5% figure.

Commerce officials also revised downward some prior growth figures for real GDP, which is the inflation-adjusted value of all goods and services produced in the U.S. The government Friday said real GDP grew 5% in the fourth quarter of 2009, down from a previously reported 5.6%.

Overall, the new data painted a picture of a deeper recession than previously believed.

Government spending and inventory adjustments have powered the economic recovery that began last summer, and they juiced up the second quarter as well. But economists expect tighter public spending, particularly by budget-strapped state and local governments, to be a drag on the economy in the coming quarters.

Many private economists projected that the unemployment rate would rise to 9.8% or higher by the end of the year.

That’s not because they think job growth will turn negative. Rather, it’s because the economy needs to create about 125,000 jobs a month just to keep pace with the natural increase in the working-age, and at the current rate of GDP growth, employers will be hard pressed to generate much more than that.

July’s jobless rate will be reported next Friday.

“When somebody hires a worker or buys a new piece of equipment, they’re taking a risk-reward calculation,” Vitner said. “And in a slow-growth environment, the rewards aren’t that high.”

Lynn Reaser, president of the National Assn. for Business Economics, said that many companies, especially smaller ones, remained reluctant to add workers because of weak private demand, tight credit and uncertainties about the outlook and government policies.

The association’s latest survey shows hiring prospects improved but still sluggish.

“There’s just a lot of angst about the future strength of the economy, the deficits and what the tax structure will look like,” said Reaser, an economist at Point Loma Nazarene University in San Diego. “The real question now relates to confidence. …Will businesses stay at the table, and will consumers at last play some part in this recovery?”

Reaser and others said the good news was that the European debt crisis, which rattled financial markets, had eased and that business investment remained very strong.

Indeed, in the second quarter, the Commerce report showed, companies’ investments rocketed 19.1% from the first quarter. That included a turnaround in outlays for buildings and a nearly 22% jump in spending for equipment and software.

But retail sales have softened and consumer attitudes have soured. On Friday, the University of Michigan reported that its index of consumer sentiment fell in July to its lowest level since last November.

But Ashworth said the latest report also offered some hopeful signs. He noted that a surge in U.S.

imports had a large negative effect on the overall GDP rate, which he sees as a

volatile component of the GDP calculations. Moreover, he and others said, although personal spending remains weak, many consumers are socking away more money.

While that may be harmful to the broader economy in the short run — the so-called paradox of thrift — it will help families improve their financial situations in the longer term.

Friday’s report showed consumers saved an upwardly revised 5.5% of their after-tax income in the first three months of this year, and the personal savings rate rose to 6.2% in the second quarter, the highest since early 1993.

That savings rate means more consumers will be in a stronger position to make purchases as the slow recovery continues, said Alan Levenson, chief economist at mutual fund giant T. Rowe Price in Baltimore. “That’s close to where we thought consumers needed to be to take them along in consumption,” he said.

Source: LA Times