U.S. Economy Grew 1.7% in Second Quarter

GM assembly lineThe final numbers on U.S. GDP growth for the second quarter are in, and they're a bit better than the previous revision's reading. GDP inched 1.7% higher in the second quarter, according to the U.S. Commerce Department, up from its earlier 1.6% estimate. The Bloomberg consensus for the final second quarter tally was also 1.6%.

Going back over the last few quarters, the U.S. economy grew at a 3.7% rate in first-quarter 2010, 5% in fourth-quarter 2009 and 1.6% in third-quarters 2009.

The Commerce Department attributed the deceleration in second-quarter GDP from the third quarter to "a sharp acceleration in imports and a sharp deceleration in private inventory investment." However, the increase to a 1.7% growth rate for the final second quarter estimate stemmed from upward revisions to inventory investment and consumer spending, offset in part by a rise in imports.

$14.58 Trillion in Second-Quarter Output

Prior to the current four-quarter rise, the economy had contracted for four consecutive quarters, including declines of 0.7% and 4.9% in the second and first quarters of 2009, respectively, and contractions of 6.8% and 4% in the fourth and third quarters of 2008, respectively.

In current-dollar terms (not adjusted for inflation), U.S. GDP rose 3.7% in the second quarter, or by $132.3 billion, to an annual rate of $14.58 trillion. In the first quarter, current-dollar GDP increased 4.8%, or by $169.1 billion.

In the second quarter, imports surged 33.5%, exports rose 9.1%, gross private domestic investment jumped 26.2%, final sales to domestic purchasers rose 4.3% and personal consumption expenditures increased 2.2%.

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The above-consensus second-quarter GDP growth rate will likely quell concerns that the world's largest economy will veer back into a ditch in the form of a double-dip recession. But it's not likely to resolve the debate in Washington between Republicans and Democrats concerning the best way to get the economy to grow faster and create more jobs to lower the nation's high 9.6% unemployment rate.

Republicans argue that fiscal stimulus hasn't worked. Their answer lies in federal income tax cuts to free money for the private sector. The GOP says extending the 2001 Bush income tax cut would be a good first step in this process. Further, they say government spending also must be cut and federal regulations eliminated for the economy to grow faster. Most Republicans would also like to see a rollback of new government mandates, including the 2010 U.S. health care reform act.

Statis Until After the Elections

Democrats, starting with President Obama, 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 accompanying financial crisis. Democrats also want the 2001 Bush income tax cut retained, but only for low- and moderate-income Americans, not upper-income Americans, arguing that extending them in that way will both support economic growth and reduce the budget deficit by about $400 billion per year.

In any event, no congressional action on the economy is expected before the Nov. 2 election -- one that will likely change the balance of power in Washington. Republicans, currently in the minority, could gain as many as 45 to 50 seats in the House, and five to seven in the Senate. The former would vault them into majority-party status in the House, which would increase their negotiation leverage versus the Democrats.
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