The U.S. economy lost momentum in the second quarter, as GDP slowed to a 2.4% annualized rate. The average over the previous two quarters was 4.4%.
However, first quarter GDP was revised upward to 3.7%, from the prior estimate of a 2.7%. Yet that just made second quarter growth appear even worse.
Consumer sentiment also fell to 67.8 in July, from 76 in June. This is a critical development since consumer spending accounts for 70% of GDP.
Though disposable income rose 4.4% in the second quarter, cautious consumers were hanging on to their hard-earned money.
Personal savings were estimated at 6.2% of disposable income last quarter, significantly higher than the 4% that had been estimated earlier.
As a result, consumer spending slowed to an increase of 1.6% after growing at a 1.9% annual pace in the previous two quarters.
As consumers continue to cut debt and save, it will result in even slower economic growth and fewer jobs in the future.
The Conference Board's chief economist predicts a 1.6% annualized rate for the second half of the year. That raises fears of a stagnating economy, and may even signal coming deflation.
The nation's trade balance continued to worsen, reaching $426 billion in the second quarter.
Imports grew at a much faster pace the exports, which rose at a 10.3% rate. However, imports soared at a 28.2% clip, the most in 34 years.
The problem with the trade deficit is that it creates a drag on GDP and jobs. Buying goods from abroad means they are not being made here at home.
Net exports subtracted 2.8 percentage points from growth. Imports had a record negative contribution to quarterly GDP.
There is no reason to suspect that the trade gap will improve any time soon, and it will continue to weigh on GDP growth.
Even as consumer spending slows, government spending is increasing, driven by extended unemployment benefits, emergency aid to struggling states, and growth in the food stamp program. A stunning one-in-eight Americans are now using food stamps, the Supplemental Nutrition Assistance Program.
Government spending rose at a 4.4% annual pace after a 1.6% drop in the first quarter. Spending by state and local governments rose 1.3%. Federal spending rose 9.2%. Government spending added 0.9% to growth.
For most Americans, none of this can be taken as a sign of progress or recovery.
The slowing GDP reading was also due, in part, to dwindling federal stimulus money. And its full exhaustion will further hinder growth in coming quarters. Coupled with weakened consumer sentiment and spending, the US economy will be hard pressed to recover.
Yet, we now know that the economy wasn't nearly as robust or healthy as we had thought, even preceding the recession.
The government also released revised data for the last three years on Friday, which revealed that the economy was on shaky legs as far back as 2006.
According to the Bureau of Economic Analysis, for 2006-2009, real GDP decreased at an average annual rate of 0.2 percent. GDP was revised down 0.2 percent for 2007, 0.4 percent for 2008, and 0.2 percent for 2009.
The US faces a series of structural issues that will be very difficult to overcome: an over-reliance on foreign oil that negatively impacts the trade balance; a dismantled manufacturing base that will be difficult to resurrect in a highly competitive and unbalanced global economy; a retiring Baby Boom population that will receive costly entitlements; the fastest growing demographic is people over 85, which is an unproductive populous; massive public and private debts that need to be paid down; and the combination of stalling GDP / shrinking tax base that will worsen the debt-to-GDP ratio.
In the current environment, it is very difficult to find a ray of sunshine.
Growth would need to equal 5% for all of 2010 just to lower the average jobless rate for the year by one percentage point. Clearly, that is not going to happen.
Advanced economies are mature economies, and are therefore harder to grow. The sad reality is that growth has been rather slow for a number of years.
Since the second quarter of 2006, there has only been one quarter in which GDP was at least 4%. And the 5.6% growth in the fourth quarter of 2009 was largely the result of government stimulus spending.
Aside from the 16 million unemployed Americans in need of work, the economy needs to add about 150,000 jobs a month just to absorb the annual increase in population and the entrance of new people into the workforce, such as college grads.
We are years from what was once considered normal, and may have in fact entered a new normal.
Optimism is indeed scare.
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