Economy Grew Only 1.3% in Spring After Nearly Stalling in Winter


Friday, 29 Jul 2011 08:37 AM

The U.S. economy grew less than forecast in the second quarter, after almost coming to a halt at the start of the year, as consumers retrenched.

Gross domestic product rose at a 1.3 percent annual rate following a 0.4 percent gain in the prior quarter that was less than previously estimated, Commerce Department figures showed today in Washington. The median forecast of economists surveyed by Bloomberg News called for a 1.8 percent increase. Household purchases, about 70 percent of the economy, climbed 0.1 percent.

Slower job and income gains raise the risk that a pickup in purchases during the remainder of 2011 will fail to materialize. The faltering economy will probably complicate the debt-ceiling negotiations in Congress and is one reason why Federal Reserve Chairman Ben S. Bernanke has said policy makers need to keep all options open.

“The transition into the second half is on rocky footing,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said before the report. “Consumers are just refusing to increase their spending, which sets the stage for a stagnant economy. We’re in economic doldrums right now.”

Forecasts of 85 economists in the survey ranged from 0.9 percent to 2.9 percent. At $13.27 trillion in the second quarter, GDP has yet to surpass the pre-recession peak.

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Advance Estimate

The GDP estimate is the first of three for the quarter, with the other releases scheduled for August and September when more information becomes available.

The Commerce Department today issued GDP revisions going back to 2003.

The 2007-2009 recession took a bigger bite out of the world’s largest economy than previously estimated and the recovery lost momentum throughout 2010, the report showed. GDP shrank 5.1 percent from the fourth quarter of 2007 to the second quarter of 2009, compared with the previously reported 4.1 percent drop. The second-worst contraction in the post-World War II era was a 3.7 percent decline in 1957-58.

Consumer spending from April through June showed the smallest gain since the second quarter of 2009, when the economy was in recession. The slump reflected a 4.4 percent plunge in purchases of durable goods like automobiles.

Higher expenses for necessities like food and energy may have curtailed spending on less essential items. The cost of a gallon of regular gasoline climbed in May to about $4 a gallon, the highest in almost three years, according to AAA, the nation’s biggest auto group.

Mounting Joblessness

The absence of faster job growth is also discouraging shoppers. The unemployment rate climbed to 9.2 percent in June while payrolls grew by 18,000, the fewest in nine months, Labor Department figures showed on July 8.

Purchase, New York-based PepsiCo Inc., the world’s largest snack-food maker, said profit this year will increase more slowly than it previously projected because of rising commodity costs and cooling customer demand.

“It’s the consumer and competitive picture that has become more difficult than we expected,” Chief Executive Officer Indra Nooyi said on a July 21 conference call.

Much of the growth in the second quarter came from business investment and trade. Spending on commercial structures, including factories and office building, and equipment contributed 0.6 percentage point to growth. The improvement in the difference between imports and exports added another 0.6 point.

Trade Gains

Overseas sales will remain a backstop for factories. Dow Chemical Co. (DOW), the largest U.S. chemical maker, said demand is “strong” in markets abroad.

“We captured strong growth in Latin America, and the emerging geographies more broadly, while North America experienced moderate growth,” Andrew Liveris, chief executive officer, said on a July 27 conference call with analysts.

Inventories grew in the second quarter at about the same pace as in the prior three months, adding 0.2 percentage point to GDP.

A slump in government spending added to the economy’s woes last quarter. Outlays by state and local agencies dropped at a 3.4 percent annual pace, and non-military spending by the federal government slumped 7.3 percent, the most since 2006.

Bernanke’s View

“In the very near term, the recovery is rather fragile,” Fed Chairman Bernanke told lawmakers on July 14. “We just want to make sure that we have the options when they become necessary” to stimulate the economy.

One area of weakness last quarter was auto purchases. Cars and light trucks sold at an average 12.1 annual rate in the April to June period, down from a 13 million pace in the first three months of the year, according to industry data.

A shortage of Japanese-made parts after the earthquake and tsunami in March slowed production at U.S. manufacturers. The shortage of components is projected to ease this quarter.

At the same time, the government’s inability to agree on a budget and debt-limit increase may be making companies reluctant to order new equipment and hire in the second half.

The employment outlook remains dim, based on company announcements this month. San Jose, California-based Cisco Systems Inc. (CSCO), the world’s largest networking-equipment maker, plans to cut about 6,500 jobs worldwide. Goldman Sachs Group Inc. will reduce staff by about 1,000, and Lockheed Martin Corp. (LMT) will offer a voluntary separation plan to 6,500 employees.

‘Still Struggling’

“Recent economic data are clear — the U.S. economy is still struggling to emerge from the Great Recession and unable to move to a path of vibrant and sustainable growth,” Dan DiMicco, chairman and chief executive officer at steelmaker Nucor Corp., said on a July 21 teleconference with analysts.

The Fed’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, climbed at a 2.1 percent annual pace, the most since the last three months of 2009, compared with a 1.6 percent in the first quarter, as higher oil and food costs pushed up the prices of other goods and services. The central bank’s longer term projection is a range of 1.7 percent to 2 percent.

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