Friday, August 27, 2010

Economic Growth in Q2 2010 was 1.6%

The Q2 2010 GDP numbers are revised downward by one-third in the most recent BEA revision. Revisions are to be expected in GDP numbers. What surprises me is that people get excited about the first press release of GDP numbers. Maybe now people will begine to realize on weak the economy really is. In addition the realization that the unemployment rate is going to remain at current levels for awhile because the economy is too weak to create jobs. From CNN

The U.S. economy sputtered to a near stop in the second quarter, according to new estimates from the government released Friday, although the slowdown wasn't as bad as many had feared.

The nation's gross domestic product, the broadest measure on the amount of spending by consumers, businesses and government, was revised sharply lower to an annual growth rate of 1.6% in the three months ending in June. The initial reading had been for a 2.4% growth rate in the period.

The report fed into growing fears that the nation could be at risk of a new economic downturn known as a double-dip recession. While the economy is still growing, growth of less than 2% is considered too weak to prompt businesses to start hiring again.

"The case for more action from policymakers to support the recovery and return the job market to health is now overwhelming," said Josh Bivens, economist with the Economic Policy Institute, a labor-supported think tank.

The downward revision was mostly due to businesses doing less to restock their inventories than previously estimated in the face of weak consumer demand. Inventories grew by only $19 billion in the quarter, down $28 billion from the earlier estimate.

Construction spending also came in weaker than assumed at the time of the original reading, with non-residential building taking the biggest hit.

A bigger-than-expected trade gap also trimmed GDP, as rising imports and weaker exports both worked against output by U.S. businesses. . . . .

. . . . "The immediate reaction suggests an attitude shifting from the glass half empty to half full," said Jim Baird, chief investment strategist for Plante Moran Financial Advisors. "The bigger picture issue remains unchanged: there is simply not enough water in the glass to quench our thirst."

While the report might not be as bad as feared, one concern is that even weaker growth could lay ahead.

The economy continued to get a lift in the second quarter by spending authorized by the stimulus act passed at the start of 2009. The Congressional Budget Office recently estimated that added between 1.7 to 4.5 percentage points of growth in the second quarter, meaning the economy would have retreated without that spending. But that spending will fall off in the second half of this year.

In addition, the economy could lose more steam because of the weakening housing market. While investment in new homes shot up 27% in the second quarter due to a tax credit for home buyers that ended in June, more recent readings show home sales hitting record lows since the end of the second quarter.

"The second quarter wasn't as bad as the headline GDP figure looks but, unfortunately, that doesn't mean the third quarter is going to be any better," said Paul Ashworth, senior U.S. economist for Capital Economics in a note to clients. "It could easily be even worse."

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