The second-quarter economic slowdown reported by the government Friday points to an economy stuck in low gear as a new look at the recession – it wasn’t as deep as thought and the recovery’s been weaker than first believed – gave new urgency to the presidential campaign.
“If we keep up at this rate, over the next year or two, we will simply never get back to full employment,” said Glenn Hubbard, a top economic adviser to Republican presidential candidate Mitt Romney.
Alan Krueger, a top economic adviser to President Barack Obama, countered that the report proved the value of Obama’s stimulus package of spending and tax cuts. He said the report found state government spending aided by the stimulus increased in 2009, helping cushion the blow of the recession, and that the end of the stimulus since then has cut state and local government spending and weakened the recovery.
Either way, the reports added up to a weak economy.
The U.S. economy grew at a sluggish annualized rate of 1.5 percent during the second quarter, the Commerce Department said, a deceleration from the 1.9 percent growth rate recorded during the first three months of 2012.
Adding to the feeling of economic blah, consumer confidence as measured by the Thomson Reuters/University of Michigan consumer sentiment index slipped in July. The survey, released Friday afternoon, showed that high food prices and weak hiring combined to sink confidence.
“The greatest concern to consumers is that wage and job growth will remain depressed in the foreseeable future, and that meager gains are likely to be diminished in the years ahead by rising taxes and benefit cutbacks,” Richard Curtin, director of the survey, said in an accompanying statement,
The weak growth in the gross domestic product, the broadest measure of goods and services produced in the U.S. economy, may improve over the remainder of the year but not by much, warned economists.
For one thing, a slowdown in China and recession in much of Europe is hurting U.S. exports, as well as sales abroad of foreign-made goods by U.S. multinationals such as Ford and General Motors.
“Our exports have been hit pretty hard. In this slow-growth environment, these kinds of shocks, concerns, are making businesses very cautious in terms of spending, and hiring in particular,” said Nariman Behravesh, chief economist for forecaster IHS Global Insight. “That explains why the jobs numbers are so weak.”
Add those woes to the fight brewing in Washington over expiring tax cuts and planned spending cuts and there’s likely to be continued subpar growth in the months ahead, even if growth steps up a bit.
“What it tells us is the economy remains stuck in low gear through the first half of 2012, but there are reasons to expect a modest acceleration in the second half of the year. Among the bright spots are housing, and we would expect that if the European situation clarifies, we could see . . . a return to risk taking that would help lead to firmer growth,” said Chris Varvares, senior managing director for Macroeconomic Advisers, whose forecast for quarterly growth was right on target Friday.
“It’s about half of what potential growth actually is in the American economy, and recoveries should be much more vigorous even after a financial crisis,” Hubbard said in a statement.
House Speaker John Boehner, R-Ohio, blamed the fear of tax increases for the slowing economy. “Today’s GDP report is a troubling sign for the future of our economy, and it underscores the need to stop all of the looming tax hikes that will weaken it further,” he said in a statement.
Krueger stressed the growth, though he said more is needed.
“Today’s report shows that the economy posted its twelfth straight quarter of positive growth,” he said on a White House blog. “While the economy continues to move in the right direction, additional growth is needed to replace the jobs lost in the deep recession that began at the end of 2007.”
The Bureau of Economic Analysis, the statistical arm of the Commerce Department, reported that the recession that ran from December 2007 to June 2009 was not as deep as first estimated. The U.S. economy contracted by a cumulative 4.7 percent during the Great Recession, the BEA said, and not the earlier estimate of 5.1 percent.
That’s due in part to revisions that showed manufacturing growth wasn’t as robust as first thought.
“Manufacturing continues to be a relative bright spot, just less so than we thought. Certainly when you are looking at employment contribution and GDP contribution, we are certainly having an outsized role, even if it is less than what we thought,” said Chad Moutray, chief economist for the National Association of Manufacturers, who fears European woes and fears of tax hikes are weighing on consumption. “Underlying a lot of that is just this continued level of anxiety that’s out there on the part of manufacturers and consumers.”
Similarly, the expansion that followed led to a cumulative, not annualized, rate of growth of 5.8 percent through the end of 2011 and not the earlier estimates of 6.2 percent. The Bureau of Economic Analysis said the 3.5 percent decrease in GDP in 2009 was actually a 3.1 percent decrease. Likewise, the 3 percent increase in GDP during 2010 over 2009 was actually a tamer increase of 2.4 percent. And last year’s sluggish growth rate of 1.7 percent over 2010 levels was a wee bit better, 1.8 percent growth.
One reason why the recession appeared worse was that state and local government spending was not fully captured in first estimates. State and local governments spent more than thought on items beyond salaries and infrastructure projects.
The Friday GDP numbers also confirmed that state and local government purchases have declined for 11 straight quarters, the longest streak ever recorded since the official record of quarterly data began in 1947, said Krueger.