Economic Growth Slows to 1.6%; Trade Gap Widens

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The government has sharply cut its estimate of U.S. economic growth in the second quarter, adding fuel to worries about the barely-moving economy.

The Commerce Department revised its estimate of gross domestic product growth in the April-to-June period to a 1.6 percent annual rate from 2.4 percent.

That's a sharp slowdown from the first quarter, when the economy grew at a 3.7 percent annual rate, and economists say it's a taste of the weakness to come. The current quarter isn't expected to be much better, with many economists forecasting growth of only 1.7 percent. Still, many economists had expected a sharper drop in the second-quarter reading.

The slow growth in the spring was mostly due to the largest surge in imports in 26 years and a slower buildup in inventories.

The economy has grown for four straight quarters, but that growth has averaged only 2.9 percent, a weak pace after such a steep recession. The economy needs to grow at about 3 percent just to keep the unemployment rate, currently 9.5 percent, from rising.

"The economy is going to limp along for the next few months," said Gus Faucher, an economist at Moody's Analytics. There's even a one in three chance it could slip back into recession, he said.

Many temporary factors that boosted the economy earlier this year are fading. Companies built up their inventories after cutting them sharply in the recession to match slower sales. The increase provided a boost to manufacturers, but now many companies' stockpiles are in line with sales and don't need to grow as much.

In addition, the impact of the government's $862 billion fiscal stimulus program is lessening.

That leaves the private sector to pick up the slack. But businesses are cutting back on their spending on machines, computers and software, according to a government report earlier this week. And the housing sector is slumping again after a popular home buyer's tax credit expired in April.

"What we're seeing is that the hand-off to the private sector is not looking as robust as we had previously hoped," said Ben Herzon, an economist at Macroeconomic Advisors.

Many analysts say the uncertainty surrounding the economy is holding back consumers from spending and companies from investing and hiring.

Consumers can't be sure their jobs are safe, with unemployment so high. Business executives don't know if sales and profits will grow enough to justify adding jobs. And potential changes to tax laws at the end of this year and other policy reforms also make it hard to plan ahead, economists say.

"People have been overwhelmed by uncertainty," said Ethan Harris, an economist at Bank of America Merrill Lynch.

A big reason for the cut in last quarter's gross domestic product is that imports surged much more in June than expected. GDP is the broadest measure of the economy's output and covers everything from auto production to haircuts.

Imports rose by 3 percent to just over $200 billion in June, while exports fell to $150.5 billion, pushing the trade gap to almost $50 billion, the biggest in nearly two years. Friday's report may show that the higher imports knocked as much as 3 percentage points off second quarter growth, economists at Goldman Sachs estimate.

But trade isn't likely to be as big a drag in the current quarter. With businesses slowing their spending on inventories and capital equipment, imports are likely to slow.

Housing, which added to the economy's growth in the second quarter, is now likely dragging it down. The homebuyer's tax credit boosted home sales in the spring, raising real estate brokers' commissions.

But home sales fell sharply in July, and new home construction also declined. That will weigh on economic growth this quarter, but its impact won't be as bad as earlier in the recession. That's because housing has shrunk so sharply.

It made up more than 6 percent of the economy at the height of the boom in 2005, but now accounts for only 2.5 percent.

High unemployment is making it harder for people to make their mortgage payments and stay in their homes.

About 9.9 percent of homeowners had missed at least one mortgage payment as of June 30, the Mortgage Bankers Association said Thursday. That number, adjusted for seasonal factors, was close to a record high of more than 10 percent at the end of April.
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