U.S. Economy Grew Less Than Forecast

The U.S. economy expanded less than forecast in the second quarter as the drag from housing and rising unemployment blunted the impact of federal tax rebates.

The economy grew at a 1.9 percent annualized rate from April through June, after a 0.9 percent pace in the first quarter that was smaller than previously estimated, the Commerce Department said in Washington. The report also contained annual revisions that lowered the growth rate back to 2005 and showed gross domestic product contracted in the last three months of 2007.

Stock-index futures dropped and Treasuries rallied after the figures raised the odds that the U.S. has entered a recession. Growth may weaken in the second half as unemployment increases, with government figures tomorrow forecast to show a seventh straight month of payroll declines.

Yields on benchmark 10-year notes fell to 3.97 percent at 8:41 a.m. in New York, from 4.05 percent late yesterday. Futures on the Standard & Poor's 500 Stock Index declined 0.7 percent to 1,276.20.

The smallest trade deficit in seven years prevented the economy from shrinking again last quarter. The trade gap narrowed to a $395.2 billion annual pace, adding 2.4 percentage points to growth, the most since 1980. Excluding trade, the economy would have contracted at a 0.5 percent pace, the second decline in the last three quarters.

The annual benchmark revisions showed the U.S. may have slipped into a recession in the last three months of 2007 as consumer spending slowed more than previously estimated and the housing slump worsened. The economy shrank 0.2 percent in the fourth quarter last year, compared with a previously reported 0.6 percent gain.

First-quarter figures were also revised down to show a 0.9 pace of growth compared with a prior estimate of 1 percent, Commerce said.

Declines in growth in the revisions are reinforcing the recession signals sent by the loss of jobs so far this year. Still, a downturn is unlikely to be officially declared for months to come.

The National Bureau of Economic Research, the Cambridge, Massachusetts-based arbiter of economic cycles, defines a recession as a ``significant'' decrease in activity over a sustained period of time. The declines would be visible in GDP, payrolls, production, sales and incomes. The NBER usually declares a recession six to 18 months after it begins.

The housing slump continued to hurt the economy, even as the decline moderated. Residential construction dropped at a 15.6 percent annual pace after dropping 25.1 percent in the first three months of the year. The decline detracted 0.6 percentage point from growth, the smallest reduction in more than two years.

Consumer spending last quarter grew at a 1.5 percent pace, less than anticipated, compared with a 0.9 percent gain in the January-to-March period that was the smallest in 13 years.

Most economists are forecasting the lift from the rebates will fade in the second half of the year. Retail sales rose 0.1 percent in June, less than forecast, indicating consumers may already have started to retrench at the end of the quarter.

Shoppers are hunting for bargains to stretch the buying power of the stimulus checks. Wal-Mart Stores Inc., the largest retailer, said same-store sales in June rose 5.8 percent, the biggest increase in four years, as costumers spent the rebate money on discounted gasoline and food.

The price index in today's report rose at an annual rate of 1.1 percent, the smallest increase since 1998 and down from 2.6 percent in the first quarter.


U.S. Economy Grew Less Than Forecast

TradingEconomics.com, Bloomberg
7/31/2008 6:07:14 AM