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GDP Falls As Economic Growth Slows To A Crawl, New Estimates Show

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GDP REVISED
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Two years after the official end of the Great Recession, the economy is still struggling to build momentum, and a full-fledged recovery remains a distant prospect.

As millions search for work, and the nation's central bank offers no sign that it will make any further efforts to promote growth, news comes that the U.S. economy grew at a slower pace this spring than previously believed, according to government estimates released Friday.

The news is grim for anyone looking for signs that the recovery has taken hold, and that hiring and expansion are on the way once more. However, there's a silver lining for corporations, whose profits went up in the spring, suggesting that the slowdown isn't hitting businesses nearly as hard as the average consumer.

Gross domestic product, the national output of goods and services, rose at an annualized rate of just 1 percent in the second quarter, according to the Commerce Department. This represents a drop from the initial estimate -- a 1.3 percent rate of growth -- which was itself well below what economists had expected.

"This kind of growth rate is not going to lower the unemployment rate. You need at least 2.5 percent," said Michael Podgursky, a professor of economics at the University of Missouri.

An annualized growth rate of 1 percent, Podgursky said, is "essentially stagnation."

According to Friday's estimates, GDP is growing at a slower rate than the U.S. population. This means the economy is shrinking on a per-capita basis -- which, in turn, means that consumer spending, one of the most important engines of economic growth, is likely to experience major "dampening," according to Jeffrey Bergstrand, a professor of finance at the Mendoza College of Business at the University of Notre Dame.

The new figures arrive at a time when investors and analysts are increasingly weighing the possibility of a double-dip recession, following weeks of uncertainty in the stock market and anxiety over political gridlock in Washington.

In spite of the disappointing GDP figure, the report did contain some positive indicators. Business spending was revised upward to 9.9 percent from the original estimate of 6.3 percent, reflecting greater investment in software, equipment and nonresidential real estate. And consumer spending estimates rose to 0.4 percent from 0.1 percent -- though that was still the smallest increase since the fourth quarter of 2009, and a significant drop-off from a 2.1 spending rate in the first quarter.

Corporate after-tax profits, which have continued to perform strongly even as other components of GDP falter, rose by 4.1 percent, their fastest rate of increase in a year.

But even this area is due for a slowdown, Bergstrand said, as firms are likely to grow more apprehensive about the lackluster economy and cut back on investment spending.

"Firms don't see growth in the economy, and they don't see sources of growth, such as monetary or fiscal stimulus," Bergstrand said, adding that corporate profits could begin declining as early as next year.

High unemployment, falling consumer confidence and a weak housing market have all weighed on the nation's economic performance this year, as have concerns over the government's long-term plan to address the federal deficit.

Last month, the Commerce Department revised its estimates for first-quarter growth dramatically downward, to a rate of 0.4 percent from a rate of 1.9 percent. It also revised its estimates for 2007 through 2010 downward, suggesting that even the modest gains the economy has made since the end of the recession have not been as great as previously thought.

Friday's report arrived the same morning that Ben Bernanke, chairman of the Federal Reserve, delivered a closely watched address in Jackson Hole, Wyo., in which he said that the U.S. would eventually see "a return to growth rates and employment levels" consistent with economic growth.

Bernanke's comments were on par with other forecasts the Federal Reserve has made this year, and with a broad consensus among economists that the U.S. will continue to experience slow growth without actually falling into a recession.

Despite noting that "it may take some time" for growth to accelerate, Bernanke gave little indication that the Federal Reserve will undertake any new programs to promote economic expansion.

The measured optimism of Bernanke and other economists is not without merit, Podgursky said. But the Fed chairman may not be taking into account the possibility of extra-economic disruptions.

"There are shocks in the world -- earthquakes in Japan, hurricanes hitting New York," Podgursky said.

"[Bernanke's] forecast is credible in the absence of negative shocks," he said. "We just don't have much of a cushion."

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