GDP report: Economic growth slows with 2.4 percent rate in second quarter

By Neil Irwin and Sonja Ryst
Washington Post Staff Writer
Saturday, July 31, 2010; A01

The recovery is fading, and a troubling new pattern is setting in: economic growth that is too slow to put Americans back to work.

Gross domestic product, the broadest measure of economic activity, grew at a 2.4 percent annual rate in the April-through-June period, the government said Friday, down from 5 percent at the end of 2009 and 3.7 percent at the beginning of this year.

The good news is that it was the fourth consecutive quarter of economic growth and that the expansion continued despite a crisis overseas and palpitations in global financial markets. The bad news is that the growth was below the long-term trend rate at which the U.S. economy expands and is not strong enough to drive down unemployment. And more worrisome, many of the details of the report point to a continued slowdown of expansion this year.

"The post-recession rebound is history," said Bart van Ark, chief economist of the Conference Board, a business research group. "We don't foresee a double dip, but we do expect growth to slow even more markedly . . . in the second half of the year."

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The new numbers -- and the spreading realization that sluggish growth may be a lasting trend rather than a one-quarter phenomenon -- hang over the political world heading into November's midterm elections. The House of Representatives left for its August recess Friday without resolution of policies meant to boost the economy, including legislation to support small-business lending.

The stalemate over government policy notwithstanding, the economic dynamic for the months ahead appears to be set: Americans' spending on goods and services is rising, but given high joblessness, stagnant wages and an overhang of debt from the boom years, consumption spending is rising too slowly to create strong growth.

Personal consumption rose at an annual rate of only 1.6 percent in the second quarter, and consumer spending appears to have softened as the quarter progressed.

"The problem is it looks like the consumer was really weakening in June, so you're starting the third quarter in a position of weakness," said David Shulman, senior economist at the UCLA Anderson Forecast. "The components of this report are ugly."

Meanwhile, a number of factors that boosted economic growth starting last summer are about to run their course.

The second-quarter GDP number, soft though it was, received a one-time boost from businesses building up their inventories (contributing 1.05 percentage points of growth) and federal government spending (0.7 percentage points), both of which are likely to fade. Growth was also supported by a burst of residential investment (adding 0.6 percentage points) -- caused by home builders' rushing to finish projects to take advantage of a home-buyer tax credit -- that probably will turn negative in future quarters.

One bright spot: Business spending on equipment and software rose 22 percent, a strong gain. Imports were a major drag on second-quarter growth but tend to be volatile and could reverse in future quarters.

In effect, a growth rate in the mid-2 percent range signifies an economy merely treading water. Population growth and technological improvement mean that the United States is capable of increasing its economic output by 2.5 to 3 percent per year indefinitely, so growth faster than that is needed to bring down joblessness and put idle factories to use.

The middling pace of growth is being felt at the nation's businesses -- especially those in the service sector -- and leading them to hold back on hiring.

"It's hard to know what will happen next," said Pamela Kebe, manager of Piccolo Piggies, a children's clothing store in Georgetown. The retailer was expecting the economy to improve, but it hasn't happened. Kebe and her team have stopped carrying the most expensive children's clothing lines, such as Simonetta, and are instead selling less-costly ones such as Eliane et Lena. Customers who used to come in willing to spend $5,000, Kebe said, are now willing to buy only about half that much.

John Ho, co-owner of Yvonne's Day Spa in Mount Vernon, said foot traffic has been down about 25 to 30 percent compared with last year. Many of his customers are tourists, who aren't traveling as much these days.

"The ripple effect of the economy is hitting us," Ho said.

The Labor Department will report on the July employment situation on Friday. The report is expected to show that private employers added 90,000 jobs this month -- a level consistent with the sluggish growth reported in second-quarter GDP and below the rate of job growth needed to keep up with an ever-growing labor force.

The onset of sluggish growth presents a challenge to policymakers in the Obama administration, in Congress and at the Federal Reserve. Unlike during the depths of the recession, when economic output was plummeting, the economy is not in the kind of crisis that creates impetus for bold action.

Economists are, for the most part, predicting an ongoing sluggish recovery rather than a renewed contraction.

"There are plenty of reasons to be concerned," said Mark Vitner, senior economist at Wells Fargo. "But I don't think we're going to have an outright double dip."

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