Economy: 'Slowdown is here to stay'

@CNNMoney August 26, 2011: 9:43 AM ET
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NEW YORK (CNNMoney) -- Economic growth in the second quarter was slightly weaker than previously estimated, according to revised U.S. government data released Friday.

Gross domestic product, the broadest measure of the nation's economic health, rose at an annual rate of 1% in the second quarter, the Commerce Department said.

In July, the government estimated that GDP rose 1.3% in the second quarter.

Economists were expecting the rate to be revised down to 1.1%, according to consensus estimates from Briefing.com.

Jim Baird, chief investment strategist for Plante Moran Financial Advisors, said last month's report caught investors by surprise.

"Today's revision doesn't pack the same punch," he said. "But it does reinforce that the economy is struggling to move forward."

The revised rate comes after the economy expanded at a meager 0.4% pace in the first-quarter.

Economic activity in the first half of 2011 has been much weaker than many had anticipated at the start of the year.

Weak growth. Monster debt. Which to tackle first?

In the first quarter, economic growth was stifled by temporary factors, including supply disruptions stemming from the Japan earthquake and a spike in gasoline prices following the Arab Spring political uprisings.

But the malaise seems to be taking hold, with consumers pulling back sharply in the second quarter.

Overall, consumer spending, which accounts for roughly 70% of gross domestic product, picked up only 0.4% in the second quarter. That was slightly better than the initial 0.1% estimate, but marks a significant slowdown from growth of 2.1% in the first three months of the year.

"Confidence remains low, and the impact is being seen as consumers continue to retrench," said Baird, adding that the increase in consumer spending was the weakest since the end of 2009.

Despite the decline in overall output, the revised data contained some positive signs, according to Paul Dales, a senior economist at Capital Economics.

He said the downward revision largely reflects a decline in trade data and a slowdown in restocking of business inventories.

In addition, he said the report showed an increase in private investment and a strengthening of "final sales to domestic purchasers."

"None of this, however, significantly improves the outlook for growth," said Dales. "GDP growth probably won't be much better in either the third or fourth quarters. The slowdown is here to stay."

A report from the Congressional Budget Office on Wednesday crystallized the bleak economic outlook.

It said the economy will grow 2.4% for this year. CBO sees growth of 2.6% for 2012 and then an average of 3.6% for the next three years.

Friday's report comes ahead of a highly-anticipated speech by Federal Reserve chairman Ben Bernanke at an annual gathering of central bank officials in Wyoming.

At last year's meeting, Bernanke sent a signal that the Fed would be willing to do a second round of asset purchases, a strategy dubbed QE2.

Many investors have been hoping that Bernanke will hint at the possibility of QE3 at this year's event. But economists say that's unlikely given the trillions of dollars in assets already on the central bank's balance sheet and the fact that interest rates are already low.

Still, investors will pay close attention to Bernanke's remarks for hints the central bank stands ready to support the economy, somehow.

Stock futures were little changed after the report came out. To top of page

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