The American economy expanded more slowly than expected from April to June, the government reported Thursday, while numbers for the last three months of 2007 were revised downward to show a contraction — the first official slide backward since the last recession in 2001.
The New York Times
Economists construed the tepid growth in the second quarter, combined with a surge in claims for unemployment benefits, as a clear indication that the economy remains mired in the weeds of a downturn. Many said the data increased the likelihood that a recession began late last year.
The next major piece of data comes Friday, when the government is to release its monthly snapshot of the job market. Analysts expect the report to show a loss of 75,000 jobs, signifying the seventh straight month of declines.
“We already knew the economy was weak, and now you have both a negative growth number coupled with job losses,” said Dean Baker, a director of the liberal Center for Economic and Policy Research. “There’s a lot of real bad times to come.”
President Bush zeroed in on the positive growth in the second quarter — a 1.9 percent annual rate of expansion, compared with an anticipated 2.3 percent rate. That follows growth of 0.9 percent in the first quarter. He claimed success for the $100 billion in tax rebates sent out by the government this year in a bid to spur spending, along with $52 billion in tax cuts for businesses.
“We got some positive news today,” the president said in West Virginia, addressing a coal industry trade association. “It’s not as good as we’d like it to be but I want to remind you a few months ago, there were predictions, and — that the economy would shrink this quarter, not grow.”
But the snapshot of disappointing economic growth released by the Bureau of Economic Analysis on Thursday morning provided no comfort to Wall Street, where a broad sell-off commenced. By the end of business, the Dow Jones industrial average was down 206 points to close at 11,378, a drop of nearly 2 percent.
The rout may have been explained in part by significant changes the government made to historical data on the profitability of American businesses. According to the revised numbers, corporate profits earned in the United States by American companies rose much more swiftly than previously recorded from 2005 through 2007, making the recent decline appear much steeper.
That the economy grew at all this spring is a testament to two bright spots — increased consumer spending fueled by the tax rebates, and the continuing expansion of American exports.
Consumer spending, which amounts to 70 percent of the economy, grew at a 1.5 percent annual rate between April and June, after growing at a meager 0.9 percent clip in the previous quarter.
“Clearly the tax rebates did give some oomph to the economy,” said Robert Barbera, chief economist at the research and trading firm ITG.
Exports expanded at a 9.2 percent annual pace in the second quarter, up from 5.1 percent in the first three months of the year. Foreign sales have been lubricated by the weak dollar, which makes American-made goods cheaper on world markets.
Adding to the improving trade picture, imports dropped by 6.6 percent, as Americans tightened their spending. Imports are subtracted from economic growth, so the effect was positive.
Over all, trade added 2.42 percentage points to the growth rate from April to June. Without that contribution, the economy would have contracted.
But many economists are dubious that consumer spending and exports can keep growing robustly in the face of substantial challenges that are now entrenched in the United States and are gathering force in many other major economies. Japan and much of Europe appear headed into downturns, damping demand for American-made products.
“The trade improvement doesn’t look sustainable,” said Jan Hatzius, an economist at Goldman Sachs in New York. “In an environment where the global economy is clearly slowing, you’re not being able to get that export growth in future quarters.”
Economists said the sharp drop in imports was largely a function of retailers delaying wholesale purchases in the midst of acute fears about declining American spending power — a dynamic that will eventually give way to new spending.
“This reflects sheer panic by retailers about what the next Christmas buying season is going to look like,” said Mark Zandi, chief economist at Moody’s Economy.com.
The tax rebates have mostly been distributed. While the checks appear to have bolstered spending, they have failed to generate activity that is likely to carry on even after the cash has cycled through the economy, say economists.
“They slowed the downturn, but it’s clear they didn’t really provide any spark,” Mr. Baker said.
Employers have not hired much, even as shopping has picked up, cognizant that the rebate checks are a one-time event. Businesses have not shelled out for new machinery. Indeed, investment for equipment fell 3.4 percent in the spring months, dropping for the second consecutive quarter.
Rather than stockpile more goods, businesses generally tried to sell what they already had on hand. Business inventories declined in the second quarter by $62 billion, a factor that shaved nearly 2 percent off the overall rate of economic growth.
As the impact of the rebate checks continues to wear off in the coming weeks, households will be left confronting the same set of troubles that have been dragging on the economy for many months: a deteriorating job market, rising prices for food and gas and plummeting housing values.
Tens of millions of Americans have in recent years borrowed aggressively against the value of their homes to finance trips to the mall, dinners out, vacations and new cars. As housing values continue to fall, that artery of finance is rapidly constricting.
Since last summer, when the mortgage crisis provoked panic on Wall Street and many Americans saw access to credit diminish, consumer spending on so-called durable goods like appliances, cars and furniture has been sliding. This spending barely grew in the last three months of 2007, fell at a 4.3 percent clip in the first three months of this year and dropped at a 3 percent pace in the second quarter.
Meanwhile, joblessness is growing, with new unemployment claims filed in the week that ended July 26 swelling to 448,000 — up 44,000 from the previous week. And the purchasing power of wages is being eroded by higher prices for food and energy. Prices paid for goods by Americans surged at a 4.2 percent annual rate in the second quarter, after climbing at a 3.5 percent annual clip over the first three months of the year, according to the report on Thursday.
Higher prices, fewer paychecks and less household wealth: It is not a recipe for free-spending abandon.
“Now, consumers have to sing for their supper,” said Alan D. Levenson, chief economist at T. Rowe Price Associates in Baltimore. “Spending growth is slowing and income growth is slowing.”
Democrats in Congress have begun devising a second package of measures to stimulate the economy, centered on aid to struggling states. But the Bush administration has resisted such proposals, and the political stakes of a presidential election year make compromise especially tricky.
The Federal Reserve has lowered interest rates in recent months to encourage businesses to invest and households to spend. But with concern growing about high prices — a trend fueled by lower interest rates — the Fed may not be able to deliver another round, even if growth slows further.
“Looking forward, I don’t think there’s anything to change the lousy trend for the domestic economy,” said Joshua Shapiro, chief domestic economist at MFR, a research firm.
With the last three months of 2007 now officially revised down — from an initial 0.6 percent annual rate of growth to a 0.2 percent decline — many economists expect that these tough times will officially be declared a recession. That label is affixed by a panel of economists at a private research institution, the National Bureau of Economic Research, though typically well after the fact.
President Bush derided such characterizations, along with the academic discipline known as the dismal science.
“You can listen to these economists,” Mr. Bush said in West Virginia. “On the one hand, they’ll say, and then on the other hand. If they had three hands, it would be on the one hand, the second hand and the third hand.”
But for many, the old debate about whether this is a recession has become purely academic, and eclipsed by the troubles at hand.
“All my cousins already know it’s a recession,” said Mr. Barbera, the ITG economist. “They have the luxury of not having Ph.D.’s. The auto companies are in dire straits, the airlines have been shutting down flights and firing pilots. The truckers are in near hysteria because of the price of diesel. If you round up the usual suspects, this is a bad circumstance. And the word we usually use for a bad circumstance is a recession.”
The New York Times
Economists construed the tepid growth in the second quarter, combined with a surge in claims for unemployment benefits, as a clear indication that the economy remains mired in the weeds of a downturn. Many said the data increased the likelihood that a recession began late last year.
The next major piece of data comes Friday, when the government is to release its monthly snapshot of the job market. Analysts expect the report to show a loss of 75,000 jobs, signifying the seventh straight month of declines.
“We already knew the economy was weak, and now you have both a negative growth number coupled with job losses,” said Dean Baker, a director of the liberal Center for Economic and Policy Research. “There’s a lot of real bad times to come.”
President Bush zeroed in on the positive growth in the second quarter — a 1.9 percent annual rate of expansion, compared with an anticipated 2.3 percent rate. That follows growth of 0.9 percent in the first quarter. He claimed success for the $100 billion in tax rebates sent out by the government this year in a bid to spur spending, along with $52 billion in tax cuts for businesses.
“We got some positive news today,” the president said in West Virginia, addressing a coal industry trade association. “It’s not as good as we’d like it to be but I want to remind you a few months ago, there were predictions, and — that the economy would shrink this quarter, not grow.”
But the snapshot of disappointing economic growth released by the Bureau of Economic Analysis on Thursday morning provided no comfort to Wall Street, where a broad sell-off commenced. By the end of business, the Dow Jones industrial average was down 206 points to close at 11,378, a drop of nearly 2 percent.
The rout may have been explained in part by significant changes the government made to historical data on the profitability of American businesses. According to the revised numbers, corporate profits earned in the United States by American companies rose much more swiftly than previously recorded from 2005 through 2007, making the recent decline appear much steeper.
That the economy grew at all this spring is a testament to two bright spots — increased consumer spending fueled by the tax rebates, and the continuing expansion of American exports.
Consumer spending, which amounts to 70 percent of the economy, grew at a 1.5 percent annual rate between April and June, after growing at a meager 0.9 percent clip in the previous quarter.
“Clearly the tax rebates did give some oomph to the economy,” said Robert Barbera, chief economist at the research and trading firm ITG.
Exports expanded at a 9.2 percent annual pace in the second quarter, up from 5.1 percent in the first three months of the year. Foreign sales have been lubricated by the weak dollar, which makes American-made goods cheaper on world markets.
Adding to the improving trade picture, imports dropped by 6.6 percent, as Americans tightened their spending. Imports are subtracted from economic growth, so the effect was positive.
Over all, trade added 2.42 percentage points to the growth rate from April to June. Without that contribution, the economy would have contracted.
But many economists are dubious that consumer spending and exports can keep growing robustly in the face of substantial challenges that are now entrenched in the United States and are gathering force in many other major economies. Japan and much of Europe appear headed into downturns, damping demand for American-made products.
“The trade improvement doesn’t look sustainable,” said Jan Hatzius, an economist at Goldman Sachs in New York. “In an environment where the global economy is clearly slowing, you’re not being able to get that export growth in future quarters.”
Economists said the sharp drop in imports was largely a function of retailers delaying wholesale purchases in the midst of acute fears about declining American spending power — a dynamic that will eventually give way to new spending.
“This reflects sheer panic by retailers about what the next Christmas buying season is going to look like,” said Mark Zandi, chief economist at Moody’s Economy.com.
The tax rebates have mostly been distributed. While the checks appear to have bolstered spending, they have failed to generate activity that is likely to carry on even after the cash has cycled through the economy, say economists.
“They slowed the downturn, but it’s clear they didn’t really provide any spark,” Mr. Baker said.
Employers have not hired much, even as shopping has picked up, cognizant that the rebate checks are a one-time event. Businesses have not shelled out for new machinery. Indeed, investment for equipment fell 3.4 percent in the spring months, dropping for the second consecutive quarter.
Rather than stockpile more goods, businesses generally tried to sell what they already had on hand. Business inventories declined in the second quarter by $62 billion, a factor that shaved nearly 2 percent off the overall rate of economic growth.
As the impact of the rebate checks continues to wear off in the coming weeks, households will be left confronting the same set of troubles that have been dragging on the economy for many months: a deteriorating job market, rising prices for food and gas and plummeting housing values.
Tens of millions of Americans have in recent years borrowed aggressively against the value of their homes to finance trips to the mall, dinners out, vacations and new cars. As housing values continue to fall, that artery of finance is rapidly constricting.
Since last summer, when the mortgage crisis provoked panic on Wall Street and many Americans saw access to credit diminish, consumer spending on so-called durable goods like appliances, cars and furniture has been sliding. This spending barely grew in the last three months of 2007, fell at a 4.3 percent clip in the first three months of this year and dropped at a 3 percent pace in the second quarter.
Meanwhile, joblessness is growing, with new unemployment claims filed in the week that ended July 26 swelling to 448,000 — up 44,000 from the previous week. And the purchasing power of wages is being eroded by higher prices for food and energy. Prices paid for goods by Americans surged at a 4.2 percent annual rate in the second quarter, after climbing at a 3.5 percent annual clip over the first three months of the year, according to the report on Thursday.
Higher prices, fewer paychecks and less household wealth: It is not a recipe for free-spending abandon.
“Now, consumers have to sing for their supper,” said Alan D. Levenson, chief economist at T. Rowe Price Associates in Baltimore. “Spending growth is slowing and income growth is slowing.”
Democrats in Congress have begun devising a second package of measures to stimulate the economy, centered on aid to struggling states. But the Bush administration has resisted such proposals, and the political stakes of a presidential election year make compromise especially tricky.
The Federal Reserve has lowered interest rates in recent months to encourage businesses to invest and households to spend. But with concern growing about high prices — a trend fueled by lower interest rates — the Fed may not be able to deliver another round, even if growth slows further.
“Looking forward, I don’t think there’s anything to change the lousy trend for the domestic economy,” said Joshua Shapiro, chief domestic economist at MFR, a research firm.
With the last three months of 2007 now officially revised down — from an initial 0.6 percent annual rate of growth to a 0.2 percent decline — many economists expect that these tough times will officially be declared a recession. That label is affixed by a panel of economists at a private research institution, the National Bureau of Economic Research, though typically well after the fact.
President Bush derided such characterizations, along with the academic discipline known as the dismal science.
“You can listen to these economists,” Mr. Bush said in West Virginia. “On the one hand, they’ll say, and then on the other hand. If they had three hands, it would be on the one hand, the second hand and the third hand.”
But for many, the old debate about whether this is a recession has become purely academic, and eclipsed by the troubles at hand.
“All my cousins already know it’s a recession,” said Mr. Barbera, the ITG economist. “They have the luxury of not having Ph.D.’s. The auto companies are in dire straits, the airlines have been shutting down flights and firing pilots. The truckers are in near hysteria because of the price of diesel. If you round up the usual suspects, this is a bad circumstance. And the word we usually use for a bad circumstance is a recession.”
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