Huffpost Business

U.S. GDP Falls AT 0.7 Percent Pace In 2Q

Posted: Updated:

WASHINGTON — The unfolding economic recovery will probably lose some momentum in the final three months of the year as rising unemployment and still hard-to-get credit weigh on consumers.

The economy will grow at a pace of around 2.5 percent in the just-started October-December quarter, according to projections made by analysts at Wells Fargo, IHS Global Insight and Moody's If accurate, that would mark a slowing from the projected growth of at least 3 percent that many economists think occurred in the just-ended third quarter.

The economy shrank at a rate of 0.7 percent in the April-June period, the Commerce Department said Wednesday.

"It's a recovery, but it is not a rapid recovery," said Nigel Gault, chief U.S. economist at IHS Global Insight.

The third quarter's performance is expected to mark a turning point for the economy, providing the strongest signal yet that the worst recession since the 1930s is over.

Many economists say consumers likely came back to life in the third quarter, boosting spending at around a 2 percent pace. If they are right, it would be the strongest showing since the first quarter of 2007, before the recession started.

But consumer spending, which supplies about 70 percent of economic activity, could turn out to be flat or post an increase of no more than 1 percent in the fourth quarter, according to economists' projections. People will be wary of splurging, given shrinking wages and rising unemployment.

"We're fairly pessimistic about the holiday shopping season," said Mark Vitner, economist at Wells Fargo Securities. "Wages and salaries are down, meaning people don't have the means to spend."

Wages in the second quarter fell 4.7 percent from the same quarter last year, the government said Wednesday.

Both businesses and consumers are still having trouble getting credit – the oxygen of the economy, analysts said.

Such forces are "likely to constrain the speed of recovery," Donald Kohn, the Federal Reserve's vice chairman warned in a speech Wednesday.

The Fed and most economists have grown increasingly confident that the recovery will be lasting. But the risk of a "double dip" recession, where the economy would slip back into negative territory, can't be dismissed, some analysts said.

"It's not out of the question," said Gault, adding that much will hinge on the behavior of both consumers and businesses in coming months.

Higher auto sales, boosted by the government's now-ended Cash for Clunkers program, was a major factor behind the third quarter's expected improvement. People were offered rebates of up to $4,500 to buy new fuel-efficient cars and trade in old gas guzzlers.

The government's first estimate of how the economy fared in the third quarter will be issued in late October. Fourth-quarter results won't be available until late January.

The recession was winding down in the spring. The 0.7 percent dip in gross domestic product for the April-June quarter followed the 6.4 percent annualized drop in the first three months of this year, the worst slide in nearly three decades. In the final quarter of last year, the economy sank at a rate of 5.4 percent

The new reading on second-quarter GDP showed the economy declining less than the 1 percent pace previously estimated. It also was better than the annualized 1.1 percent drop that economists were predicting.

Federal Reserve Chairman Ben Bernanke in September said the recession, which started in December 2007, was "very likely over." But he warned that pain will persist – especially for the nearly 15 million unemployed Americans.

Because the recovery is expected to slow to a more plodding pace in coming months, the nation's unemployment rate – now at a 26-year high of 9.7 percent – is expected top 10 percent this year. Economists predict it will have nudged up to 9.8 percent for September when the government releases that report Friday.

The economy has now contracted for four straight quarters for the first time on records dating to 1947. Economic activity shrank 3.8 percent since the second quarter of last year, marking the worst recession since the 1930s.

"We all ardently want to believe the nation is on the economic comeback trail," Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said in a speech in Mobile, Ala. "In thinking about the recovery, I recommend for now a mindset of measured optimism."

Around the Web

Gross domestic product - Wikipedia, the free encyclopedia

List of countries by GDP (nominal) - Wikipedia, the free encyclopedia

News Release: Gross Domestic Product

GDP Definition