Flow of imports drags down economic growth

These leaders have been a driving force behind the nation's economic policies since the financial crisis of 2008.
By Howard Schneider and Ariana Eunjung Cha
Friday, August 27, 2010; 10:12 AM

The Commerce Department slashed its estimate for U.S. GDP growth in the second quarter from a 2.4 percent annual rate to 1.6 percent, confirming fears that economic growth has slowed to a crawl.

Although the numbers were grim, they were expected to have been worse. The growth rate topped calculations by economists who had forecast that the earlier estimate would be almost halved to an annualized rate of 1.4 percent.

Corporate investment in such big-ticket items as new machinery and computers drove a lot of the growth in the second quarter, but troubles in the nation's housing sector, unemployment and, especially, trade all were a drag.

The government said the trade deficit subtracted almost 3.4 percentage points from second-quarter GDP - the largest hit from trade in 63 years.

The trade deficit spiked an abrupt 16 percent in June from the largest surge in imports in 26 years. The unemployment rate remains stuck at 9.5 percent and first-time unemployment claims continue to remain at levels much higher than what's considered healthy for the economy. Sales of existing homes and new homes in July hit record lows.

The government report showed that companies reining in inventories also contributed to slower GDP growth. The Commerce Department said earlier this week that orders for durable goods rose a bare fraction of what experts had predicted.

Although the economy has grown for the past four quarters, the deceleration in growth has been rapid.

The 1.6 percent growth rate in the April-to-June quarter compares with a solid 3.7 percent in first quarter of this year and a breakneck rate of 5.7 percent in the final quarter of 2009.

Many economists expect the nation's GDP to continue at a similarly weak pace through the rest of the year and have expressed worry that we're headed toward another recession.

New York University economist Nouriel Roubini put the odds of a double-dip recession at 40 percent while Mark Zandi, the chief economist at Moody's, said his estimate is 33 percent.

Later Friday morning, Federal Reserve Chairman Ben Bernanke is scheduled to deliver a major policy speech at an economic symposium in Jackson Hole, Wyo., that will provide another perspective on the economy.

Investors are eagerly awaiting whether the Fed will take any additional action to prop up the economy. But with interest rates near zero and Congress preoccupied with mid-term elections, it's unclear what steps could be taken.

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