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U.S. recovery sputters

chart_gdp_100730b.top.gif By Hibah Yousuf, staff reporter


NEW YORK (CNNMoney.com) -- The U.S. economy continued to grow during the second quarter, the government reported Friday. But the pace slowed more than economists were expecting, raising concern about growth - or even another recession - in the months ahead.

Gross domestic product, the broadest measure of the nation's economic activity, rose at a 2.4% annual rate during the three months ended June 30, the Commerce Department said.

The sluggish pace was down from the upwardly revised 3.7% growth rate in the first quarter, and missed economists' forecast for a 2.5% increase.

Still, the figure marked the fourth straight quarter of growth and gave credence to some economists' views that the recession that began in December 2007 likely ended at some point in mid-2009.

"This solid rate of growth indicates that the process of steady recovery from the recession continues," said Christina Romer, chair of the White House Council of Economic Advisers, in a statement.

"Nevertheless, faster growth is needed to bring about substantial reductions in unemployment," she added. "Much work clearly remains to be done before the U.S. economy is fully recovered."

Most troubling to economists - particularly in the months ahead - was a slowdown in consumer spending, which accounts for 70% of economic activity.

Nigel Gault, chief U.S. economist at IHS Global Insight, said the subdued consumer spending, pressured by high unemployment and debt as well as a lack of income and credit access, could lead to slower growth - or even another downturn.

"People are continuing to cut back, and that could mean that third-quarter growth will be the worst since the end of the recession," Gault said. "The slowing growth path leaves the possibility of a double-dip recession on the table."

The report showed consumer spending rose at a modest 1.6% rate last quarter. That compares to a 1.9% rise during the first quarter, revised down from a previously reported 3%.

A surge in imports also weighed on domestic growth, the government said. Imports spiked 28.8% during the second quarter, up from an 11.2% hike in the previous quarter.

But that increase was mostly due to 17% jump in business investments, as business increased spending by 22% on software and equipment, which Gault said are primarily produced outside of the United States.

"Businesses reduced spending very sharply last year during the recession by cutting costs and employees," Gault said. "The pullback helped them prop up profits. Companies are sitting on huge piles of cash, which they're now putting to work."

While they're willing to refresh their technology equipment, Gault said businesses are still cautious when it comes to hiring, and that will continue to strain the economy.

He added that the quarter's significant increases in housing and government spending were driven by temporary factors and will likely reverse into declines in the current quarter.

The report showed that residential investment climbed 28% during the second quarter, as Americans rushed to buy homes ahead of the expiration of the homebuyer tax credit.

And government spending rose 9.2% during the quarter, up from 1.8% in the first quarter. Gault attributed that growth to spending related to the decennial census.

Recession deeper than previously thought

Revisions to annual GDP rates also released Friday indicated that the economic downturn was worse than the government previously estimated, and the recovery was more slack.

Between the fourth quarter of 2007, when the recession officially began, and the second quarter of 2009, when many economists say it ended, GDP dropped by 4.1%, marking the deepest recession since 1947. The government's prior estimate for the overall decline during the period was 3.7%.

"It now appears that the financial crisis may have affected production substantially more quickly than was previously reported or realized at the time," Romer said.

The most significant factor in the downward revisions was muted consumer spending, but the data also showed that the consumer savings rate is higher than expected.

Annual growth rates for 2007, 2008 and 2009 were all revised lower.

In 2007, the government said the economy grew at a rate of 1.9%, down from the 2.1% it reported earlier. In 2008, economic activity was flat instead of ticking up 0.4%. And in 2009, the economy shrank at a rate of 2.6%, weaker than the 2.4% rate previously estimated.

"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," said Martin Regalia, chief economist for the U.S. Chamber of Commerce, which has been critical of Obama administration business policies.

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