Economy sputters, new numbers show

Economic statistics released today offered the clearest sign yet that the recovery, already acknowledged to be sauntering, had slowed to a crawl.

The U.S. government lowered its estimate of economic growth in the second quarter to an annual rate of 1.6 percent, after originally reporting last month that growth in the three-month period was 2.4 percent.

The revision is a significant slowdown from the annual rate of 3.7 percent in the first quarter and 5 percent in the last three months of 2009.

The news came at the end of a week that showed the economic retrenchment that began in the second quarter has spilled over into the summer. Existing home sales in July were down to their lowest level in a decade, and sales of new homes that month were at their lowest level since the government began tracking such data in 1963. Orders for large factory goods, excluding the volatile transportation sector, dropped in July, indicating that recovery in the manufacturing sector is also stalling.

With such grim reports, economists are now concerned that the outlook for job creation, which has been sputtering all summer, could deteriorate further. "When you get a downshift in growth there is a risk that it will feed on itself," said James F. O'Sullivan, the chief economist at MF Global. "The question now is to what extent has the improving trend just been temporarily set back or has it really been short-circuited."


The bulk of the downgrade in the second-quarter GDP resulted from government analysts having assumed that U.S. companies added more inventories to their warehouse shelves than they actually did. The adjustment also took into account a sharp rise in imports, leading to a wider-than-estimated trade deficit.

Economists polled by Bloomberg had been expecting the second-quarter growth figure to be revised down to 1.4 percent.

Inventories, originally reported to have grown by $75.7 billion, actually grew by $63.2 billion. Some economists pointed to a silver lining in this figure. Because companies have kept inventories relatively low, "if demand was to take off, they would have to hire additional workers and ramp up production," said Omair Sharif, U.S. economist at the Royal Bank of Scotland. "So the fact that businesses did not accumulate enough inventories sets the stage for a much stronger pickup in employment and hours worked in the future, if demand picks up."

Economists have been revising their forecasts for growth in the second half of 2010, with Goldman Sachs now projecting annual growth of 1.5 percent. Ben Herzon, a senior economist at Macroeconomic Advisers, a forecasting group, said the firm had taken its estimate for third-quarter growth down to 1.7 percent from 2.5 percent at the beginning of July.

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