Imports stifle US 2nd-quarter growth, spending up | business | Hindustan Times
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Imports stifle US 2nd-quarter growth, spending up

business Updated: Aug 27, 2010 22:38 IST

US economic growth was revised down on Friday to a 1.6 per cent annual rate in the second quarter, pointing to an even softer performance in the third quarter.

The Commerce Department report showed gross domestic product, the measure of total goods and services output within US borders, was dampened by the largest increase in imports in 26 years. Nonetheless, growth was not quite as weak as anticipated.

So far, analysts do not believe the economy will slide back into recession and say the most likely prospect is for continued soft expansion rather than a double dip downturn.

"The outlook continues to be one of modest growth rather than double dip. The question remains whether subpar growth that fails to bring down the unemployment rate is a high enough bar for further Fed policy action," said Julia Coronado, an economist at BNP Paribas in New York.

Federal Reserve Chairman Ben Bernanke told monetary policymakers at their annual retreat in Wyoming the recovery had softened more than expected and reiterated the US central bank was ready to take further steps if needed to spur growth.

"The committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly," he said. For more, see: [ID:nN27259859]

A private survey showed consumer sentiment pulled back in late August from earlier in the month but still improved from late July.

Gross domestic product growth previously was estimated at 2.4 per cent and analysts had feared it would be pushed down even more sharply. But robust business investment and a slight firming in consumer spending partially cushioned the blow from imports.

Analysts polled by Reuters had forecast GDP would be revised to a 1.4 per cent growth rate. The economy grew at a 3.7 per cent pace in the first three months of the year.

At midday, US stocks were higher on the GDP report coming in stronger than expected and Bernanke saying the Fed would do what is needed to spur growth. But investors sold off government debt, taking profits on a recent run-up, and the US dollar rose against the euro.

BAD POLITICAL OMEN

A slackening recovery poses a major political challenge for the Obama administration and the Democratic Party a little over two months away from crucial mid-term elections that could shift the balance of power in Congress in favor of Republicans.

A Reuters/Ipsos poll this week found Obama's approval rating at 45 per cent, overtaken for the first time by a 52 per cent disapproval rating.

While growth in the United States is slowing, output in other industrialized nations is holding up. Britain's economy grew at its fastest pace in nine years in the second quarter on strong construction activity. [ID:nLDE67Q0PR]

The US economy's recovery from its worst economic downturn since the Great Depression had been largely fueled by an $862 billion government stimulus package and businesses rebuilding inventories from record low levels.

A growing budget deficit makes it unlikely the government will inject more money into the economy to shore it up.

Growth in the last quarter was stifled by a 32.4 per cent surge in imports, the largest since the first quarter of 1984, dwarfing a 9.1 per cent rise in exports. That created a trade deficit, which sliced 3.37 per centage points from GDP, the largest subtraction since the fourth quarter of 1947.

"The growth in imports is across the board. The strong demand for imports indicates there is pent up demand out there, but for growth it's negative because exports are not keeping pace," said Gus Faucher, director of macroeconomics for Moody's Economy.com in West Chester, Pennsylvania.

INVENTORY BOOST FADING

A smaller contribution from business inventories than initially estimated also restrained output. Business inventories increased only $63.2 billion, rather than the previously estimated $75.7 billion, adding a slim 0.63 per centage point to GDP.

Inventories, which had been a major driver of the recovery that started in the second half of 2009, increased $44.1 billion in the first three months of the year.

Excluding inventories, the economy expanded at a 1 per cent rate, instead of the 1.3 per cent pace reported last month.

There were some bright spots in the report, with growth in consumer spending revised up to a 2 per cent rate from 1.6 per cent. Consumer spending grew at a 1.9 per cent rate in the first quarter.

Stubbornly high unemployment has dampened consumer spending and added 1.38 per centage points to GDP last quarter.

Although businesses have been reluctant to hire new workers, they have been splurging on equipment and software, which also contributed to the surge in imports. Business investment was revised up to a 17.6 growth per cent rate, the largest increase since the first quarter of 2006, from the previously estimated 17 per cent pace.

Investment in equipment and software was the strongest since the fourth quarter of 1983.

Growth in new home construction was revised down slightly to 27.2 per cent from 27.9 per cent. The sector, which was a drag on growth in the first quarter, was lifted by a spurt in building activity spurred by a popular home-buyer tax credit, which has since expired. The rate of increase was still the biggest since the third quarter of 1983.

Residential investment had contracted at a 12.3 per cent rate in the first quarter.

The report also showed corporate profits rose 2.9 per cent in the second quarter after increasing 5.8 per cent in the first three months of the year.