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GDP report: Sharp slowdown in economic growth

chart_gdp_100827.top.gifU.S. economic growth in the second quarter was revised down to 1.6% from 2.4% in a government report Friday. By Chris Isidore, senior writer

NEW YORK (CNNMoney.com) -- The U.S. economy sputtered to a near stop in the second quarter, according to new estimates from the government released Friday, although the slowdown wasn't as bad as many had feared.

The nation's gross domestic product, the broadest measure of economic activity, was revised sharply lower to an annual growth rate of 1.6% in the three months ending in June. The initial reading had been for a 2.4% growth rate in the period.

"It's a crawl-stagger-crawl recovery," said Paul Ballew, senior vice president at insurancer Nationwide Financial. "It's certainly far more subdued than we need."

The report fed into growing fears that the nation could be at risk of a new economic downturn -- a double-dip recession -- leading some economists to darken their outlook for the economy, upping estimates for another slowdown.

"There are spots of strength here and there, but looking ahead growth will be anemic and that's why the probability of a double dip is so high," said Sung Won Sohn, economics professor at Cal State University Channel Islands. He estimates that the risk of a double dip has risen to 40% from only a 25% chance at the start of the year.

One leading concern is stubbornly high unemployment. While the economy is still growing, growth of less than 2% is considered too weak to prompt businesses to start hiring again.

Still, U.S. stocks rose in early trading on the news, as the revision was not quite as severe as expected. Economists surveyed by Briefing.com had forecast a revised reading of 1.4% growth in the period.

"The immediate reaction suggests an attitude shifting from the glass half empty to half full," said Jim Baird, chief investment strategist for Plante Moran Financial Advisors. "The bigger picture issue remains unchanged: there is simply not enough water in the glass to quench our thirst."

Some economists said the weak report could prompt the Obama Administration and Democrats in Congress to push for additional federal action to try to spur the economy.

"The case for more action from policymakers to support the recovery and return the job market to health is now overwhelming," said Josh Bivens, economist with the Economic Policy Institute, a labor-supported think tank.

Some expect further action by the Federal Reserve to spur the economy as well. Speaking in Jackson Hole, Wy., Friday morning, Federal Reserve chairman Ben Bernanke bluntly acknowledged that the U.S. economic recovery has lost considerable steam, but pledged that the central bank has the necessary policy tools to support continued growth.

The downward revision was mostly due to businesses doing less to restock their inventories than previously estimated in the face of weak consumer demand. Inventories grew by only $19 billion in the quarter, down $28 billion from the earlier estimate.

Construction spending also came in weaker than assumed at the time of the original reading, with non-residential building taking the biggest hit.

A bigger-than-expected trade gap also trimmed GDP, as rising imports and weaker exports both worked against output by U.S. businesses.

Still some economists pointed to details deep within the report for a glimmer of hope. George Mokrzan, senior economist for Huntington National Bank, said corporate profits rising to a level not seen since 2006 should put businesses in a good position to eventually start adding workers.

"Typically, when corporate profits are rising, hiring tends to follow," he said.

Bumpy road ahead

While the report might not be as bad as feared, one concern is that even weaker growth could lay ahead.

The Congressional Budget Office recently estimated that spending authorized by the stimulus act of 2009 added between 1.7 to 4.5 percentage points of growth in the second quarter, meaning the economy would have been far worse without stimulus.

But that spending will fall off in the second half of this year, the CBO acknowledged, and the boost to the economy will gradually diminish.

In addition, the economy could lose more steam because of the weakening housing market. While investment in new homes shot up 27% in the second quarter due to a tax credit for home buyers that ended in June, more recent readings show home sales hitting record lows since the end of the second quarter.

"The second quarter wasn't as bad as the headline GDP figure looks but, unfortunately, that doesn't mean the third quarter is going to be any better," said Paul Ashworth, senior U.S. economist for Capital Economics in a note to clients. "It could easily be even worse." To top of page

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