WASHINGTON — The U.S. economy slowed sharply from April through June, the government reported Friday, growing at an annualized rate of just 2.4 percent after several quarters of more robust growth.
The 2.4 percent rate of growth in the nation's gross domestic product, the value of all goods and services produced, fell within the range of analysts' expectations. What wasn’t expected, however, was an upward revision to the growth rate in the first quarter.
The Commerce Department had reported that the economy grew at an annual rate of 2.7 percent from January through March, but Friday it said that first quarter growth was actually 3.7 percent.
That upward revision makes second-quarter growth appear even weaker by comparison, and that may help explain why for weeks many businesses and economists have been discussing what felt like a jolting slowdown in the U.S. economy.
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Friday's report included revisions to prior data from previous years, and the revisions suggest that things weren’t what they appeared to be at the time. The new data show that the economic contraction from December 2007 to June 2009, a period in which the economy is commonly viewed as in recession, was 4.1 percent, worse than the prior estimate of 3.7 percent.
"It appears that the recession was even worse than previously thought," said Martin Regalia, the chief economist for the U.S. Chamber of Commerce, in a statement. "Thus, while the recession was somewhat deeper than originally thought, the recovery was also much more tepid that previously thought, and is slowing rather than accelerating."
There was some good news Friday’s mixed reports.
U.S. exports grew at an annual rate of 10.3 percent in the second quarter, and business investment rose at an annual rate of 17 percent, after a rate of 7.8 percent in the first quarter. It means businesses are confident enough to begin spending some of that cash that many large firms have been sitting on during the recession.
Imports grew at an annual rate of 28.8 percent in the second quarter, their fastest pace since early 1984, the government said, a signal that businesses were gobbling them up to replenish and build inventories to meet growing demand.
“The best news in the report was the second 20%-plus annualized increase in business equipment and software spending in a row (led by high-tech). Businesses are much readier to spend on capital equipment and software than they are to re-hire workers,” Nigel Gault, chief U.S. economist for forecaster IHS Global Insight, said in a research note. “The not-so-good news is that much of this extra equipment is imported.”
The surge in imports, however, shaved as much as 2 percentage points off U.S. growth, since GDP measures goods and services produced in the United States, and imports amount to a subtraction in the equation.
The auto industry, which imports finished products and components for U.S. assembly from Canada and Mexico, is thought to be responsible for a significant portion of the import growth.
The quarterly GDP report from the Bureau of Economic Analysis was less encouraging on consumption, which drives about 70 percent of U.S. economic activity. Consumption rose 1.6 percent from April through June, down from a revised 1.9 percent rate in the first three months of 2010.
“Consumers are traumatized. They’re paying down debt. There is a shortage of credit availability for many small businesses and consumers,” said Lyle Gramley, a former Federal Reserve governor and the senior economic researcher at the Potomac Research Group. “When we look at the future, it is about as difficult now to make a forecast as anytime I remember.”
Confirming the sluggish consumption data, the University of Michigan Surveys of Consumers, which measure consumer sentiment, fell sharply in July, although slightly less than mainstream analysts had forecast.
Christina Romer, head of the White House Council of Economic Advisers, put a positive spin on the mixed report.
"Growth in the first quarter was revised up to 3.7%, meaning that growth has averaged over 3% for the first half of 2010. This solid rate of growth indicates that the process of steady recovery from the recession continues," she said in a White House blog posting.
Independent analysts’ reactions to Friday’s GDP report were mostly positive.
“Growth slowed more than expected in the second quarter, but only because first-quarter growth was revised significantly higher. The year-over-year picture for real GDP growth, at 3.2 percent, was exactly what we projected,” said forecaster RDQ Economics in New York, in a note to investors. “Moreover, we find some constructive takeaways for the prospects of growth in the second half of the year.”
Those positive signs include evidence that the recovery is being driven less by consumption, and a higher household savings rate that’s held steady this year. Both suggest that consumers are getting their finances in order. In addition, the fast pace of business spending is likely to continue, RDQ analysts said.
Still, most consensus forecasts call for 2 percent to 2.5 percent growth in the second half of 2010, not brisk enough to make a serious dent in the numbers of unemployed, now exceeding 15 million Americans.
“Contrary to the often-made claim that the near-term economic future is ‘uncertain,’ today’s report provides near certainty that very high unemployment rates will _ absent aggressive action by policymakers _ plague the economy for years to come,” said Josh Bivens, the chief economist for the liberal Economic Policy Institute, which advocates government stimulus spending, in a statement.
The unemployment rate is 9.5 percent. Analysts await next week’s reports on hiring activity in July to see whether it will point to continued sluggish growth or to another downturn.
“The economy entered the second quarter with plenty of momentum, and left it with very little. The implication is that growth in Q3 will be slower than in Q2,” wrote Gault, adding that a “full reversal into a double-dip recession remains a possibility, but is still not our base case.”
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