Economic Growth Drops to 2.4% in Second Quarter

As expected, the U.S. economy slowed in the second quarter to a 2.4% growth rate, the U.S. Commerce Department announced Friday, but that disappointing statistic was offset somewhat by the fact that first-quarter GDP growth was revised up to 3.7% from the previously estimated 2.7%.

A Bloomberg survey had predicted second-quarter GDP would increase 2.5%. The U.S. economy grew 2.2% and 5.6% in the fourth and third quarters of 2009, respectively.

In addition, the Commerce Department revised its estimate for the 2007-2009 recession's severity to a real GDP contraction of 2.8%, worse than the previously-released 2.5% contraction. In non-inflation-adjusted terms, GDP shrank by 4.1%, worse than the previously-released 3.7% estimate.

In other words, the recession -- already recognized as the worst in the U.S. since the Great Depression -- was deeper than economists first calculated. The federal government revises its GDP estimates for earlier quarters as it receives information not available earlier.

A Year of Growth, But Is Recession Over?

Separately, the employment cost index rose 0.5% in the second quarter, after an 0.6% increase in the first quarter, the U.S. Labor Department said. A Bloomberg survey had predicted an 0.4% increase in the second quarter.

In current dollar terms (not adjusted for inflation), U.S. GDP rose 4.3% in the second quarter, or by $151.3 billion, to an annual rate of $14.60 trillion. In the first quarter, GDP increased 4.8% or by $169.1 billion in current dollar terms.

The second quarter was the fourth consecutive quarter of rising GDP. Prior to that, the economy had contracted for four 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. But despite those four straight quarterly GDP gains, officially, the recession is not over. While many observers say the economy is recovering, the National Bureau of Economic Research, the official determiner of the economic cycle, has not put a date on the end of the downturn.

TepidConsumer Spending Weighs On GDP

In the second quarter, one clear reason the U.S. economy performed well below its potential was that budget-pinched consumers remained frugal. Consumer spending rose at a 1.6% rate, down from a 1.9% rate in the first quarter. Meanwhile, final sales increased a modest 1.3%, compared to 1.1% in the first quarter.

However, business investment represented a ray of light, surging 17% after rising 7.8% in the first quarter.

Imports also soared at a 28.2% pace in the second quarter, while exports rose at a 10.3% rate. However, the trade deficit means net exports subtracted from GDP growth in the second quarter.

GDP Likely To Intensify Washington Debate

The sub-par second quarter GDP growth rate also 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 tax cuts to free up money in the private sector. The GOP says extending the 2001 Bush income tax cuts would be a good first step in this process. Further, they say government spending also must be cut and federal regulations eliminated to allow the economy to grow faster.

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

One thing Republicans and Democrats can agree on: The U.S. economy is growing far too slowly and will need some engine of growth -- tax cuts, fiscal stimulus, or otherwise -- to both lower unemployment and keep corporate revenue and earnings rising.