The report from the Commerce Department showed the economy grew at a snail’s pace of 1.3 percent in the spring, sapping hopes that the recovery would pick up later this year. Perhaps even more alarming was that the agency said the economy in the first three months of the year was far worse than it had been initially estimated, with growth at a near-standstill.
Economists said the trajectory of the recovery could hinge on the outcome of the debate over the amount the nation can borrow. And the data inflamed the partisan debate about the government’s role in stimulating the economy.
Liberals said the weak gross domestic product figures showed that massive government cutbacks were unwise, while conservatives said that lowering the budget deficit should be the priority.
President Barack Obama seized on the report to urge lawmakers to reach a compromise on raising the federal borrowing limit.
“The power to solve this is in our hands,” Obama said at the White House. “And on a day when we’ve been reminded how fragile the economy already is, this is one burden we can lift ourselves.”
The bad economic news and the uncertainty over the debt ceiling helped drag stocks to another losing session Friday, leaving the markets with their worst week in a year.
The Dow Jones Industrial Average, an index of blue-chip stocks, fell 537.92 points this week, or 4.24 percent — its largest weekly drop since July 2010. The Standard & Poor’s 500 index and tech-heavy Nasdaq were both down about 4 percent this week.
The second quarter’s gross domestic product growth rate, the broadest measure of economic activity, is far lower than the 1.8 percent rate many economists estimated.
On the economic front, home prices increased for a second month and unemployment claims made a huge one-week bounce that is probably too good to be true. Pending home sales looked better, boding well for the upcoming existing home sales reports. Meanwhile, new home sales remained deep in recession. Durable goods orders were disappointing even as shipments remained remarkably robust. While the GDP report for the June quarter disappointed some with 1.3% real growth, it actually did slightly better than I expected. Other than another month or two of high car prices, which will boost the inflation rate, the last of the negative effects of the Japanese supply issues should have washed through most of the economic statistics.
Despite relatively benign second-quarter numbers, the statisticians threw us all a huge curve ball, reducing the first-quarter GDP growth rate to 0.4% from 1.9%, based largely on adjustments to inventories and a downward revision to exports. Given that consumption numbers and investment numbers were largely untouched, I am not terribly concerned. However, the data now perversely show that the economy picked up steam between the first and second quarters; this doesn't seem to square with other data including the employment report and company data that are showing a deceleration. The revision will make it more difficult to reach my 2.5% growth rate for the full year, but I still believe it is possible. The need for me to make a downward adjustment will depend on the next two months of employment data.
BEA also took the opportunity to revise the last five or more years of GDP data with this report. As I suspected, the recession now looks worse and the recovery looks slower. I was surprised at the magnitude of the reduction in the first-quarter 2011 GDP growth rate--down to a mere 0.4% from 1.9%. The majority of the adjustment was related to inventories, with net exports also contributing to the large revision. Consumption and business spending--the key drivers of economic activity--remained virtually unchanged from the previous GDP report. While the reduction looks scary and creates headlines, I am not reading much into the unusually large revision. Next week I will update readers with a table detailing the key contributors to this economic recovery.
Initial unemployment claims dipped to 398,000 from 422,000 in the latest week. While I will take good news any time I can get it, I suspect that a return of auto workers after the auto industry's summer shutdowns, the end of the Minnesota furloughs, and processing issues in California all contributed to the improvement. Whether a number this low is sustainable is an open question, but I wouldn't panic if the number backs up again for a couple of weeks. On a sad note, I am afraid the improved layoff results are coming too late to aid the July employment report; this week's data came after the July 15 date used for the employment report (the initial claims data was for the week ending July 22, and most U.S. auto plants reopened after their normal summer shutdown on July 18).
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