The U.S. economy’s rebound
from recession may be faltering.
Gross domestic product grew at a 1.1 percent annual rate in
the second quarter, compared with 5 percent in January-March, the
Commerce Department said. A separate survey of purchasing
executives showed that manufacturing in the Chicago area expanded
this month at the slowest pace since contracting in January.
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The economy shrank for nine months of last year, instead of
three months as the government estimated earlier. Sluggish growth,
tepid job gains and the stock market’s decline may restrain
consumer and business spending in the months ahead.
“It’s just a very slow, damp economic recovery with not a
lot of strong momentum,” said John Silvia, chief economist at
Wachovia Corp. in Charlotte.
Stocks fell on investor concerns a weaker economy may reduce
profits. The April-June pace was half the 2.3 percent increase
expected by economists and the slowest since a 0.3 percent
contraction in the third quarter last year.
The economy was restrained by slower consumer spending and a
worsening trade deficit. “The economy is still moving forward,
but if consumers don’t pick up the slack in the next few months,
the economy will remain subpar,” said Chris Rupkey, senior
financial economist at Bank of Tokyo-Mitsubishi Ltd. in New York.
Last year the economy shrank during the first nine months,
three times as long as first estimated. The first-quarter rate of
growth was more than a percentage point lower than estimated last
month.
Recession
The report showed that a recession that began in March 2001
was deeper than previously estimated. The economy shrank at a 0.8
percent annual rate from January to September 2001, compared with
earlier estimates of a 0.1 percent rise, the Commerce Department
said.
While the recession was worse, the rebound that started in
the last three months of 2001 was stronger. The economy grew at a
2.7 percent annual pace from October to December, a percentage
point faster than the initial estimates.
An index of manufacturing in the Chicago area fell to 51.5 in
July from 58.2 in June. Readings higher than 50 mean business
increased. The index was the weakest since January, when
manufacturing in the area contracted.
U.S. Treasury securities rose and stocks fell after the
report. The 4 7/8 percent Treasury note maturing in February 2012
rose 19/32 point, pushing down the yield 8 basis points to 4.51
percent, at 11:20 a.m. New York time.
Government Debt Sale
The Treasury increased the size of its quarterly debt sale by
21 percent, suggesting the Bush administration is expecting a
larger budget deficit. Government spending is rising to pay for
the war on terrorism and the weak economy is slowing receipts.
The Dow Jones Industrial Average declined 90 points, or 1
percent, while the Standard & Poor’s 500 Index fell 7.6 points, or
0.8 percent.
The GDP price deflator rose at a 1.2 percent rate. That
compares with a 1.3 percent rise in the first quarter and suggests
the inflation is under control. Tame inflation helps growth
because it boosts spending power.
Consumer spending, which accounts for two-thirds of the
economy, rose at a 1.9 percent annual rate in the second quarter,
the slowest since the third quarter. Spending rose at a 3.1
percent pace in the first three months of the year. In May, cars
and trucks sold at the slowest pace in four years, according to
AutoData Corp. statistics, as General Motors Corp. and Ford Motor
Co. scaled back zero-interest loan offers.
Second Half
The automakers have since brought back or expanded their use
of no-interest loans, which are luring shoppers and may make July
the best month of the year for dealers. That’s one reason most
economists said they expect consumer spending growth to continue.
Growth is expected to accelerate to 3.3 percent in the third
quarter and 3.7 percent in the final three months of the year,
according to this month’s consensus forecast by the Blue Chip
Economic Indicators.
“The economy seems to be bottoming out,” said Bill Sanders,
chief financial officer at Kforce Inc., a provider of staffing
services in Tampa, Florida. “We’re seeing a slight improvement.”
Imports surged at a 23.5 percent rate in the second quarter
after rising at an 8.5 percent pace in the first. Exports rose
11.7 percent at an annual rate in the second quarter after rising
3.5 percent in the first. That left a trade deficit, which
subtracted 1.77 percentage points from second-quarter growth.
“The surge in imports could have been exaggerated by the
threat of a longshoremen strike on the West Coast this summer,”
said Jade Zelnik, chief economist at Greenwich Capital Markets
Inc. in Greenwich, Connecticut.
Canadian Economy
Meantime, Canada’s economic growth stalled in May as
production cooled. Gross domestic product was little changed from
April at C$966.7 billion ($614 billion), Statistics Canada said.
The pause followed a 0.8 percent increase in April.
Business investment in equipment and software rose at a 2.9
percent annual rate in the second quarter after falling at a 2.7
percent pace in the first.
Economists and executives are expressing reservations about
the sustainability of such increases. Sun Microsystems Inc., whose
servers run corporate networks and Web sites, only two weeks ago
said it expects that its sales for the current year will miss
analysts’ forecasts, one of several companies to warn about
slowing sales.
Inventories rose by $1 billion at an annual rate,
contributing 1.15 percentage points to growth. This increase
followed a $28.9 billion drop in the first quarter.
Government spending rose at a 1.8 percent annual rate. That
compares with a 5.6 percent pace in the first quarter. Spending on
national defense rose at an 8 percent rate as the government wages
a war on terrorism.
Bloomberg News
