U.S. Q2 growth cut sharply

As if American consumer confidence needed another hit, it appears that the strong economic growth announced in the second quarter was something of a mirage.

A housing report issued on Tuesday revealed that home sales had fallen off a cliff in July. Now comes revised GDP data that may have Canadian investors worried about their U.S. allocation, as our southern neighbour threatens to tilt back into recession.

The U.S. economy grew at a much slower pace this spring than previously estimated, mostly due to the largest surge in imports in 26 years and a slower buildup in inventories.

Gross domestic product grew at a 1.6% annual rate in the April-to-June period, the Commerce Department said Friday. That’s down from an initial estimate of 2.4% last month and much slower than the first quarter’s 3.7% pace. Many economists had expected a sharper drop.

The widening trade deficit subtracted nearly 3.4 percentage points from second quarter growth, the largest hit from a trade imbalance since 1947, the government said.

The report confirms the economy has lost significant momentum in recent months. Most analysts expect the nation’s GDP will continue to grow at a similarly weak pace in the current July-to-September quarter and for the rest of this year.

The economy has grown for four straight quarters, but that growth has averaged only 2.9%, a weak pace after such a steep recession. The economy needs to expand at about 3% just to keep the unemployment rate, currently 9.5%, from rising.

But the news isn’t necessarily as bad as it could have been, according to Nigel Gault, chief U.S. economist at IHS Global Insight, who says the economy is probably still growing, but very slowly.

“The downward revisions came, as expected, in foreign trade and manufacturing inventories, but there were partial offsets from higher energy consumption and inventories,” he wrote in an analysis note. “The big picture showed strong growth in domestic spending, but pulling in imports rather than stimulating domestic production.

“There was some good news in the report in surging corporate profits and capital equipment spending. Companies have cash available to spend but it has been going for replacement investment and efficiency, not for capacity expansion and re-hiring.”

But much of that spending involved the purchase of imported goods. Imports surged 32.4%, the most since 1984. That overwhelmed a 9.1% increase in exports.

Consumers spent a bit more in the second quarter than previously estimated. Their spending rose at a two% annual rate, slightly higher than the first quarter’s 1.9%.

Economists expect many other supports for economic growth to fade. Federal government spending and the housing sector bolstered the economy last quarter, but housing has slumped again and will likely drag growth down in the third quarter. The impact of the federal government’s $862 billion stimulus package is also projected to taper off this year.

There are few other signs of strength. Even business investment is expected to drop, as a report earlier this week showed that business orders for capital goods fell in July.

The government’s GDP report measures the economy’s output of goods and services and covers everything from autos to haircuts. Friday’s report is the second of three estimates the government makes each quarter.

(08/27/10)