Revision of Second Quarter GDP Shows Slowing Economy

Second quarter GDP was revised from the estimated 2.4 percent to 1.6 percent.

August 27, 2010, 6:50 AM

Aug. 27, 2010— -- The sputtering economy may be headed for a double-dip recession after the government revised the nation's gross domestic product downward for the second quarter to 1.6 percent from an initial estimate of 2.4 percent.

The first quarter grew at a 3.7 percent annual rate, the second quarter 1.6 percent, and this quarter is not likely to be anything worth bragging about, with economists forecasting growth of only 1.7 percent. GDP is the value of all goods and services produced in the U.S. and it's the key indicator of the nation's economic health.

The numbers are numbing -- not nearly strong enough to give the recovery enough stride so that employers will want to hire, consumers will have the confidence to spend, or for businesses to invest robustly in equipment.

Investors will be paying close attention to the Kansas City Fed's economic symposium in Jackson Hole, Wyoming. Fed Chairman Ben Bernanke is expected to speak on the US economic outlook and policy response at 10:00 am ET.

The GDP data follows a series of disappointing reports on the housing sales this week and will add pressure on the Obama administration, which already is worried about a slowing economy ahead of November congressional elections.A White House official said on Thursday that a vacationing President Barack Obama was watching the economic data closely and may address it publicly."You can expect you will see the president talking about it soon," White House spokesman Bill Burton said. "I don't have a specific date for it, though."

Imports of goods and services in June grew to their highest level since October 2008, leaving a much wider trade deficit than the government had assumed in its advance estimates last month for second-quarter growth . Economists are at a loss to explain the jump in imports, which occurred at a time when domestic demand is very anemic. Import growth is usually associated with strength in underlying domestic demand.

"The jump in imports is out of proportion with the growth in domestic demand. It's a fairly weak recovery but we get the biggest drag from external trade, it just doesn't make sense," said Paul Ashworth, a senior U.S. economist at Capital Economics in Toronto.

The slackening economic recovery is a nightmare for the Obama administration and the Democratic Party two months away from crucial mid-term elections that could shift the balance of power in Congress in favor of Republicans.A Reuters/Ipsos poll this week found Obama's approval rating at 45 percent, overtaken for the first time by a 52 percent disapproval rating.

The recovery from the worst economic downturn since the Great Depression had been largely fueled by a $862 billion government stimulus package and businesses rebuilding inventories from record low levels.

Still, many economists remain unconvinced the economy is close to tipping back into recession.

"There is no doubt we are losing momentum in the economic recovery," said Robert Dye, senior economist at PNC Financial Services in Pittsburgh. "But if we define recession as two or more consecutive declining quarters of GDP, I think we are not going to go there.

"We are going to see a pattern where we may have declining GDP in one quarter followed by smaller gains in the next quarter, bouncing along the bottom as it were," Dye said.

"Productivity slowed last quarter as stretched work forces led to the biggest increase in hours worked in more than four years," said Ryan Sweet, a senior economist at Moody's in West Chester, Pennsylvania.

"This should put a little pressure on margins, which have expanded strikingly, and cause profit growth to slow considerably after a three-quarter stretch in which growth averaged close to 10 percent."

Reuters contributed to this report.

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