RISMEDIA, August 3, 2010—(MCT)—U.S. economic growth slowed sharply in the spring, the government reported, adding to prospects for continuing financial pressures on millions of American families and a long, drawn-out struggle for the unemployed.
While many economists had expected growth to moderate, the reported decline was a jolting 35% below the previous quarter—falling from an upwardly revised 3.7% expansion rate in the first quarter to just 2.4% in the April-June period.
Underlying the government’s report was an unusual crosscurrent running through the economy: Corporate America is flourishing, investing heavily on new computers and other equipment, whereas many consumers are cutting back their spending as they try to pare down 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 Association, 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. That was down from a growth rate of 3.7% in the gross domestic product in the first quarter—a figure adjusted up from 2.7% reported earlier.
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 of building inventory that had been depleted during the recession.
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 up the unemployment rate beyond June’s 9.5% figure.
Commerce officials also revised down the growth in real GDP—the total value of goods and services produced in the U.S. after adjusting for inflation—for the fourth quarter of last year, to 5% from 5.6%, as well as for some prior quarters. 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 somewhere around 125,000 jobs a month to keep pace with the working-age population increase—and at the current rate of GDP growth, employers will be hard pressed to generate much more than that.
“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 Association for Business Economics, said that many companies, especially smaller ones, remain 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 Leaser, 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 that the good news is that the European debt crisis, which rattled financial markets, has eased and that business investment remains 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. The University of Michigan recently reported that its index of consumer sentiment fell in July to the lowest level since last November, with many people down on the current economic situation.
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 them improve their financial situation 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.
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