Federal estimate shows U.S. economy appears to be slowing

Jul 31, 2010 — Richmond Times-Dispatch

David Ress

Jul. 31, 2010 (McClatchy-Tribune Regional News delivered by Newstex) -- RICHMOND, Va. -- The U.S. economy's growth slowed this spring, according to a closely watched -- but usually heavily revised -- federal statistical estimate.

The U.S. Commerce Department's flash estimate of the total of goods and services produced in the country -- the gross domestic product -- showed the GDP grew at an annual rate of 2.4 percent during the second quarter.

At least until the statisticians take another crack at the number next month.

The GDP is down from a first-quarter rate of 3.7 percent -- a rate the statisticians yesterday revised upward by 1 percentage point, for a 37 percent correction.

Confused? Just wait.

Christine Chmura said the slower rate in the second quarter and the upward revision in the first quarter come down to a challenge of counting when businesses started beefing up inventories.

"Now, in underlying numbers, there are a lot of other areas of growth," said Chmura, president of Richmond-based Chmura Economics and Analytics.

"And you saw they revised a lot of numbers from earlier years -- turns out it was what we all felt, the recession was a lot deeper."

Mark Vitner, senior economist at Wells Fargo Securities in Charlotte, said the second-quarter growth was moderate and pretty much what he had expected.

"The recovery over the last year now looks a little stronger, with real GDP up 3.2 percent over the past year," he said.

"The strength is somewhat misleading, however," he said, pointing to a series of revisions of earlier government estimates of economic activity.

The quarterly GDP estimate released yesterday is based on surveys of economic activity for the first two months of the April-to-June quarter as well as assumptions by government economists and statisticians about data they don't have.

Yesterday, they said their revision for the first quarter GDP estimate turned out to have understated growth by 1 percentage point. The economy, they now estimate, grew at an annual rate of 3.7 percent in that quarter.

On top of that, they said, their regular reviews showed their estimates for economic growth in 2007, 2008 and 2009 also were wrong -- at least for now.

The economy in 2007, they now think, grew by 1.9 percent, or 9.5 percent less than the 2.1 percent rate they had revised previously.

In 2008, the economy didn't grow at all, instead of posting the 0.4 percent gain they thought it had. Last year, the latest thinking is the economy shrank by 2.6 percent, a 7 percent downward revision.

In this year's second quarter, consumer spending, fixed investment and rises in business inventories boosted the economy, the Commerce Department said.

Tax incentives meant to get consumers to buy big-ticket items, rebates for buying energy-efficient appliances, and hot weather leading people to crank up air conditioners all boosted consumer spending, while the inventory run-up likely means businesses will scale back new orders for goods in the months to come, Vitner said.

"Is this negative or positive?" asked Kent Engelke, managing director of Henrico County-based Capitol Securities Management. "Negative: corporate America has restocked, therefore a possible downturn in production. . . . Positive: confidence that tomorrow's economic activity will be greater."

He said strong business investment reported in the estimates suggests the economy is on track to recover.

But others aren't so sure.

"The recovery is slowing, and the short-term fixes have almost reached their final stretch," said David Brat, an economics professor at Randolph-Macon College in Ashland.

"The consumer is feeling down, and consumption is growing slowly -- way too slow for this stage in the recovery," Brat said.

Altogether the combination of consumer spending growth, a 19 percent jump from last year's level in investments in buildings, equipment and software, and a nearly 28 percent rise in business inventories should have boosted the economy by a total of 3.7 percent, according to the Commerce Department's tabulations of the various estimates and assumptions on which it draws.

But imported goods -- up by an estimated and staggering 35 percent compared with the previous year -- count as shrinking the economy, and the effect for the quarter translated to a 4 percent decline in total economic activity.

Adding in the effect of a 9 percent rise in federal spending, an estimated 10 percent rise in exports, and various odds and ends yields the 2.4 percent figure -- for now.

Contact David Ress at (804) 649-6051 or dress@timesdispatch.com.

Newstex ID: KRTB-0177-47493321