Economic Growth Slows to 1.6% Rate in Second Quarter

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Economic Growth Slows to 1.6% Rate in Second QuarterThe fears of economists and business executives regarding the U.S. economy have been confirmed: GDP growth slowed to a 1.6% rate in the second quarter, according to revised figures released Friday by the Commerce Department's Bureau of Economic Analysis. However, the slowdown wasn't as severe as economy watchers had anticipated.

The low growth rate, down from the previously estimated 2.4% rate, means the U.S. economy is limping along -- barely growing, and certainly not expanding fast enough to substantially reduce the nation's high 9.5% unemployment rate.

Economists surveyed by Bloomberg had predicted the revised report would show the GDP growth rate had slowed to a 1.3% pace second quarter. The U.S. economy grew 3.7%, 2.2%, and 5.6% in the first quarter of 2010, and in the fourth and third quarters of 2009, respectively. Although the second-quarter GDP revision didn't show an economy as weak as economists had feared, it certainly won't eliminate concerns that the nation is veering toward a double-dip recession.

The U.S. government revises its GDP estimates on a regular basis as it receives information not available earlier.

Prior to the current four-quarter expansion, the economy had contracted for four consecutive quarters, including declines of 0.7% and 6.4% in the second and first quarters of 2009, and a 5.4% contraction in fourth quarter of 2008.

Trade Deficit Weighs On GDP Growth

In the second quarter, growth slowed largely due to a worsening of the nation's trade imbalance. Imports surged 32.4%, compared to their previously-estimated 28.2% growth rate. Meanwhile, export growth was revised lower, to 9.1%, down from the previously estimated 10.3%. Overall, net trade activity subtracted from GDP growth in the second quarter.

Also in the second quarter, final sales increased 4.3%, consumer spending rose 2%, and gross domestic income increased 2.3%.

In current dollar terms (not adjusted for inflation), U.S. GDP rose 3.6% or by $128.6 billion in the second quarter to an annual rate of $14.58 trillion. That contrasts with a previously-estimated 4.3% or $151.3 billion rise to $14.60 billion for the quarter.

Anemic GDP Growth Likely To Intensify Washington Debate

News of the low GDP growth rate is likely to intensify the debate in Washington between Republicans and Democrats concerning how best to stimulate the economy and prevent a double-dip recession.

Republicans argue that fiscal stimulus hasn't worked, and the answer lies in federal income tax cuts to free up money for the private sector. The GOP says extending the 2001 Bush income tax cut would be a good first step in this process.

Many, if not most Republicans, say they would also like to see a rollback of government regulations and programs, including the recently-passed U.S. health care reform act. They say these added regulations and federal mandates are only increasing cost hurdles for businesses, making it harder for them to expand operations and add employees.

Democrats counter that the fiscal stimulus has worked -- it prevented a deeper recession -- and that its main flaw was that it wasn't big enough, given the massive economic crater created by the bursting of the housing bubble and the accompanying financial crisis.

Democrats, including President Obama, also say the 2001 Bush income tax cut should be retained only for low- and moderate-income Americans, not upper-income Americans. They argue that the tax cut helped create the massive budget deficit and national debt that have weakened the dollar, increased commodity prices, and postponed critical investments in value-adding areas, like education, infrastructure and basic research, and are key to increasing economic growth.

One of the few things Republicans and Democrats can agree on is that the U.S. economy is growing far too slowly and needs some intervention to encourage growth -- tax cuts or fiscal stimulus, be it monetary/quantitative, or otherwise -- to both lower unemployment and keep corporate revenues rising.

If that stimulus or catalyst does not appear, the economy will probably fall in to a double-digit recession -- deepening and prolonging the nation's worst economic contraction since the Great Depression.
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