US growth slows to 2.4% in 2nd quarter

By LUCIA MUTIKANI | REUTERS

Published: Jul 30, 2010 22:59 Updated: Jul 30, 2010 22:59

WASHINGTON: US economic growth slowed in the second quarter as a capital investment drive by businesses sucked in imports at the fastest pace since the first quarter of 1984.

Gross domestic product expanded at a 2.4 percent annual rate, the Commerce Department said in its first estimate on Friday, after an upwardly revised 3.7 percent growth pace in the January-March quarter.

Analysts polled by Reuters had forecast GDP, which measures total goods and services output within US borders, growing at a 2.5 percent rate in the second quarter. The government had previously estimated a 2.7 percent growth rate for the first three months of this year.

"The anticipated slowdown in the economy is happening. Will business investment fall off a cliff next quarter if domestic consumer spending continues to flag?" said Lee Olver, managing director of financial strategies at Madison Williams & Co. in Houston.

The economy, which is digging out of its longest and deepest recession since the 1930s, has now grown for four straight quarters. However, growth has been too tepid, making little impact on a high unemployment rate.

The sluggish economy and a 9.5 percent unemployment rate are eroding President Barack Obama's popularity and dimming Democrats' prospects in November's mid-term elections.

A Reuters-Ipsos poll this week showed only a 34 percent approval of Obama's handling of the economy and jobs compared to 46 percent who deemed it unsatisfactory.

This is a sharp decline from early 2009, shortly after he took office, when more than half of those surveyed approved of Obama's handling of the worst financial crisis in decades.

Growth in the last quarter was held back by a 28.8 percent surge in imports, which eclipsed a 10.3 percent rise in exports. The widening trade deficit lopped off 2.78 percentage points from growth, the largest subtraction since the third quarter of 1982.

While the import surge subtracted from GDP, growing imports and robust business spending suggest strength in underlying demand.

"Imports are a bit peculiar because rising imports suggest strong demand in the economy, increased optimism. But also it's a leakage from the US. The production doesn't go to the US income," said Zach Pandl, an economist at Nomura Securities International in New York.

Outside the trade sector, however, there were some encouraging details in the report. Business investment rose at a 17 percent rate, the largest increase since the first quarter of 2006, after a 7.8 percent pace during the prior period.

Spending on equipment and software posted its strongest growth since the third quarter of 1997, while investment on structures rose for the first time since the third quarter of 2008, likely boosted by a rise in oil and gas drilling.

Growth during the second quarter was also supported by new home construction, which surged at a 27.9 percent rate after being a drag on GDP in the first quarter, reflecting a spurt in building activity spurred by a popular home-buyer tax credit that has since expired.

The rate of increase was the biggest since the third quarter of 1983. Residential investment had contracted at a 12.3 percent rate in the first quarter.

But there were some areas of concern. The report showed consumer spending was not robust. Consumer spending grew at a 1.6 percent rate in the second quarter after increasing at a revised 1.9 percent pace in the first quarter.

Consumer spending, which normally accounts for 70 percent of US economic activity, had previously been estimated to have grown at a 3 percent rate in the first quarter. Spending added 1.15 percentage points to GDP last quarter.

With so much domestic demand sated by overseas production, US businesses found stocks piling up on their shelves. Inventories increased $75.7 billion in the second quarter after a $44.1 billion rise in the first three months of the year.

Stripping out the rise in inventories, which could dampen future production, the economy would have expanded at only a 1.3 percent rate in the second quarter.

Separate reports showed current business conditions in New York City fell in July to its lowest level in 11 months, while employment costs in the second quarter rose a mild 0.5 percent as the soft economy kept a lid on wages and benefit costs slowed. ¬