Weak US growth adds to gloom – Financial Times

Financial Times, 31/07/2008

The US economy grew at an annual rate of 1.9 per cent in the second quarter, a faster pace than earlier in the year but slower than economists were expecting, the commerce department said on Thursday.

Growth was lifted by a mix of surging exports and falling imports, and higher levels of consumer spending caused by the delivery of nearly $100bn in stimulus cheques to Americans by the government beginning in May.

However, businesses drew down inventories much more rapidly in the second quarter than they had earlier in the year as they adapted to the tougher economic conditions, keeping gains to GDP below the 2 per cent level forecast by economists.

Revisions to previous US growth data included a dramatic change for the fourth quarter of last year, when the economy shrank by an annual rate of 0.2 per cent compared to the previous calculation of 0.6 per cent growth.

“This will make it a bit easier for the National Bureau of Economic Research to declare that the US economy is in recession should the other monthly indicators it focuses on…remain weak, as we expect they will,” said Goldman Sachs economists.

A small downward revision was also made to the growth rate in the first quarter of this year, bringing it to a 0.9 per cent annual rate from the previous 1 per cent level. Overall GDP estimates for the past three years were also lowered slightly, with 2007 growth dropping from 2.2 per cent to 2 per cent.

Although the fiscal stimulus led to a 1.5 per cent increase in personal consumption in the second quarter, compared with a 0.9 per cent jump in the first quarter, the impact was not as strong as some economists had hoped.

While exports rose by 9.2 per cent, much faster than the 5.1 per cent pace in the first quarter, imports declined at a pace of 6.6 per cent, compared with a 0.8 per cent drop in the first quarter, reflecting the weakness of domestic demand.

The US housing sector continued to be a severe drag on US growth, but it was not as bad as it has been previous quarters, contracting at an annual rate of 15.6 per cent compared with 25.1 per cent drop earlier in the year and a decrease of 27 per cent late last year. The surprise reduction in inventories – of $62.2bn, compared with $10.2bn in the first quarter - was also one of the main negative forces in second quarter GDP.

Some encouraging news came on inflation, since the price index for domestic purchases excluding food and energy costs was flat at 2.2 per cent, while including commodity prices it rose from 3.5 per cent in the first quarter to 4.2 per cent in the second.

The release of the GDP figures came as fresh fears about the health of the US labour market were raised by a surprise spike in weekly jobless claims, which rose by 44,000.