US economy: GDP growth much weaker than thought

US economic growth chart

US economic growth is much weaker than first thought, government figures show.

The economy grew at an annualised rate of 1.3% in the second quarter, the Commerce Department said. Economists had forecast growth of 1.8%.

And in a surprise move, first-quarter growth was revised down sharply from 1.9% to 0.4%.

This evidence of economic weakness increases the pressure on the government as it attempts to increase its borrowing limit.

Slow growth makes it more difficult for the US to tackle its deficit.

If Congress does not raise the debt limit by 2 August, the US government could face funding shortfalls that it cannot meet by extra borrowing.

Start Quote

Businesses can't hire until consumers start spending, but people won't spend unless they're sure they have jobs”

End Quote Carl Riccadonna Economist, Deutsche Bank

President Barack Obama urged Democrats and Republicans in the Senate "to find common ground" on a plan to address the debt crisis.

"There are plenty of ways out of this mess. But we are almost out of time.

"If we don't come to an agreement, we could lose our country's triple A credit rating," he said. "That is inexcusable."

"On a day when we've already been reminded how delicate the economy is, we can end [this crisis] ourselves."

US markets opened lower, with the Dow Jones, the S&P 500 and the Nasdaq all falling 1% in early trade.

European markets, which were already in negative territory, saw further falls after the figures were released.

'Shocking'

After the revision, the US growth figures now correspond to a quarterly increase of just 0.1% in the first three months of 2011, followed by a 0.3% rise in the second quarter.

Economists had expected steady growth in the second quarter, now that supply constraints from Japan after the earthquake and tsunami are easing.

Start Quote

The White House will see a silver lining in today's grim GDP figures, if they help to remind the negotiators on Capitol Hill of the fragility of the US recovery”

End Quote

The main reason for the lower-than-expected second-quarter figure was that consumer spending virtually ground to a halt, growing by just 0.1%, compared with 2.1% growth in the first quarter.

The large downward revision to the first quarter's growth figure was made as a result of lower capital investment and higher imports than first thought, and adjusting how seasonal factors are taken into account.

In addition, growth for the fourth quarter of 2010 was revised down from 3.1% to 2.3%, indicating that the economy had already started slowing before the end of last year.

Tim Ghriskey, chief investment officer at Solaris Asset Management, said the figures were "shocking".

"Clearly this is evidence of a mid-cycle slowdown. The only question now is do we see a pick-up in the second half and so far the economic data to date doesn't suggest that.

"You might have some analysts come out and talk recession, talk about a double dip. Right now none of the forecasts even come close to that but this is weak data."

Worse recession

The Commerce Department's Bureau of Economic Analysis makes annual revisions to its GDP estimates every July, incorporating more complete and detailed data.

It now says that the US recession of 2007-2009 was more severe than previously reported, with the economy shrinking by 5.1% over that period, rather than 4.1%.

But it also says that growth in 2010 was a bit stronger than it had first estimated.

It now puts 2010 growth at 3%, up from the previous 2.9%.

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