Economists said that the trajectory of the recovery could hinge on the outcome of the rancorous debate over the amount the nation can borrow. And the data inflamed the partisan debate about the government’s role in stimulating the economy.
Liberals said the weak gross domestic product figures showed that massive government cutbacks were unwise, while conservatives said that lowering the budget deficit should be the priority.
President Obama seized on the report to urge lawmakers to reach a compromise on raising the federal borrowing limit.
“The power to solve this is in our hands,” Obama said at the White House. “And on a day when we’ve been reminded how fragile the economy already is, this is one burden we can lift ourselves.”
The bad economic news and the uncertainty over the debt ceiling helped drag stocks to another losing session Friday, leaving the markets with their worst week in a year.
The Dow Jones industrial average, an index of blue-chip stocks, fell 537.92 points this week, or 4.24 percent — its largest weekly drop since July 2010. [Story, Page 19] The Standard & Poor’s 500 index and tech-heavy Nasdaq were both down about 4 percent this week.
The second quarter’s gross domestic product growth rate, the broadest measure of economic activity, is far lower than the 1.8 percent rate many economists estimated.
Moreover, Commerce had said the economy grew at a 1.9 percent annual rate during the first quarter, but the agency revised that figure to 0.4 percent. Together, the data show that economic growth during the first half of 2011 was at its slowest pace since the recession ended.
The largest drag on economic growth during the second quarter was state and local governments, which are cutting jobs and billions of dollars in spending to balance their budgets. While federal spending increased, state and local spending dropped at a rate of 3.4 percent.
“The state fiscal gaps still look very wide over the next couple of years and will probably get worse in the coming year,” said Josh Bivens of the Economic Policy Institute.
States were able to delay cutbacks when they received hundreds of billions of dollars from the federal government in 2009 to ride out the recession, but that money has all been spent. Now state governments are slashing spending and raising taxes.
The pace of state and local spending has declined for seven of the last eight quarters and is not likely to improve soon, economists said. Instead, they said the specter of more government cutbacks, whether as part of a deal to raise the debt ceiling or as a consequence of congressional leaders failing to reach an agreement, is likely to trickle down to localities and could further hold back economic growth.