U.S. Economy Grew a Revised 1.6%

The U.S. economy grew at a 1.6 percent annual rate in the second quarter, less than previously calculated, as companies reined in inventories and the trade deficit widened.

Corporate profits grew last quarter at the slowest rate in a year and employee wages in the prior three months were revised lower.

Today’s GDP report showed consumer spending, which accounts for about 70 percent of the economy, rose at a 2 percent annual rate in the second quarter compared with a previously reported 1.6 percent pace. The revision reflected revised electricity and natural gas usage data, the Commerce Department said.

Purchases increased at a 1.9 percent rate from January through March.

A lack of job growth, declines in household wealth following slumps in stocks and housing, and the drive to reduce debt and boost savings are reasons consumer spending may struggle to strengthen.

Wages and salaries increased by a revised $6.5 billion in the first three months of 2010 from the fourth quarter, compared with $18.8 billion initially reported. The figures incorporate new, more comprehensive data from the Labor Department and show why consumer spending will be hard-pressed to accelerate in coming months.

Figures this week showing a further slide in home sales and a drop in business spending on equipment prompted economists such as Joseph LaVorgna of Deutsche Bank Securities Inc. to reduce third-quarter growth estimates.

The trade gap in the second quarter widened to $445 billion, compared with an initial estimate of $425.9 billion, subtracting 3.37 percentage points from growth, the biggest reduction since record-keeping began in 1947, today’s report showed. Imports grew at a 32.4 percent pace, the most since 1984.

Slower inventory accumulation contributed 0.63 percentage points to second-quarter growth. The Commerce Department said in its initial report that stockpiles added 1.05 percentage points to growth after adding 2.64 percentage points in the first three months.

Today’s report also showed gross domestic income, or the money earned by the people, businesses and government agencies whose purchases go into calculating growth, rose at a 2.3 percent annual rate from April through June.

By comparison, GDP expanded 3.6 percent from April through June before adjusting for inflation. According to Fed research, GDI is a better gauge of the economy.

Revisions to first-quarter income showed a gain of 4.1 percent, compared with a 5.6 percent pace initially reported. GDP before adjusting for changes in prices rose at a 4.8 percent pace from January through March.

Corporate profits rose 4.6 percent in the second quarter, the smallest gain since the same three months last year, after a 10.5 percent increase in the first three months of the year, today’s report showed. Earnings were up 39 percent from the same time last year. The increase indicates companies have the wherewithal to boost spending on new equipment and add to payrolls.

Business spending on new equipment and software advanced at a 24.9 percent pace last quarter, the most since 1983, more than the prior estimate of 22 percent. Spending on structures, including office buildings and factories, rose at a 0.4 percent in the second quarter.

The Fed’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, rose at a 1.1 percent annual pace. The reading underscores the Fed’s pledge to keep interest rates near zero in coming months.

U.S. Economy Grew a Revised 1.6%

TradingEconomics.com, Bloomberg
8/27/2010 11:53:39 AM