Imports slow Q2 growth as business spending surges

WASHINGTON Fri Jul 30, 2010 5:06pm EDT

Crews load and unload consumer products at the Port of New Orleans along the Mississippi River in New Orleans, Louisiana in this June 23, 2010 file photo. REUTERS/Sean Gardner

Crews load and unload consumer products at the Port of New Orleans along the Mississippi River in New Orleans, Louisiana in this June 23, 2010 file photo.

Credit: Reuters/Sean Gardner

Related Video

WASHINGTON (Reuters) - U.S. economic growth slowed in the second quarter as companies invested heavily in equipment from abroad and the pace of consumer spending eased, raising concerns about the recovery in the rest of 2010.

The fastest rate of business spending in four years would normally be associated with increased confidence in the economy, but analysts said cash-flush companies were merely making up for ground lost during the recession.

Another factor pointing to anemic growth in coming quarters was a big rise in inventories. Against a backdrop of tepid consumer demand, the increase implied businesses probably have too much stock on their shelves and in their warehouses.

"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, head of financial strategies at Madison Williams & Co. in Houston.

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

Financial markets had forecast GDP, which measures total goods and services output within U.S. borders, growing at a 2.5 percent rate in the second quarter from a previously estimated 2.7 percent rate for the first three months of the year.

A second report showed manufacturing activity in the nation's Midwest region accelerated this month as orders rebounded strongly, a hopeful sign after a string of data had suggested factory activity was faltering.

The slow growth pace reinforced views the Federal Reserve would keep overnight interest rates near zero until the second half of next year. The U.S. central bank has said it stands ready to ease monetary policy further if the recovery withers.

Stocks on Wall Street initially fell on the GDP data, but recouped losses to end flat and wrap up their best month in a year following a round of solid corporate earnings reports.

Prices for safe-haven U.S. government bonds soared, with the yield on the two-year note falling to a record low 0.563 percent, while the dollar hit its lowest level since November against the Japanese yen.

TEPID GROWTH

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.

Further, the government also published revisions to prior growth data, which showed the downturn was more severe than previously thought.

President Barack Obama, whose popularity has been battered by the sluggish economy and a 9.5 percent unemployment rate, told auto workers in Detroit that more needed to be done to lift the economy.

"We've got to keep on increasing that rate of growth and keep on adding jobs so we can move forward," he said.

The poor state of the economy has dimmed Democrats' prospects in November's mid-term elections. A Reuters-Ipsos poll this week found only 34 percent of Americans approve of Obama's handling of the economy. Forty-six percent deem it unsatisfactory.

Worries about jobs pulled consumer sentiment in July to its lowest since November, according to Thomson Reuters/University of Michigan's Surveys of Consumers on Friday.

Consumer spending, the engine of the economy, grew at a modest 1.6 percent rate in the second quarter after increasing at a downwardly revised 1.9 percent pace in the first quarter, the Commerce Department said.

Business investment spending, however, surged 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.

"Businesses are making up for lost ground right now. If they are looking at a more sluggish expansion, I think they will slow their investment activity," said Joel Naroff of Naroff Economic Advisors in Holland, Pennsylvania.

New home construction, which grew at the fastest pace since the third quarter of 1983, also supported the rise in GDP but that reflected a spurt in building activity spurred by a popular home-buyer tax credit that has since expired.

IMPORTS WEIGH

While business spending shot forward, imports satisfied that demand and acted as a brake on U.S. output.

Imports grew at a 28.8 percent rate, the biggest rise in 26 years and a gain that eclipsed a 10.3 percent increase in exports. The widening trade gap lopped off 2.8 percentage points from growth, the most since the third quarter of 1982.

With so much domestic demand sated by overseas production, U.S. 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.

"That suggests scope for additional contribution to growth from inventories through the second half of this year is probably about over," said Keith Hembre, chief economist at First American Funds in Minneapolis, Minnesota.

Stripping out the rise in inventories, the economy expanded at only a 1.3 percent rate in the second quarter.

"Consumer confidence, personal income and labor indicators don't really provide a picture that would suggest the real final sales category is likely to accelerate in a material way," said Hembre.

"What you're going to see is GDP numbers migrate down to that underlying trend in real final sales which is pretty modest, between 1 and 2 percent."

(Additional reporting by Ann Saphir in Chicago and Richard Leong in New York; Editing by Andrea Ricci)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (25)
JuWan wrote:
hope it will getting better

Jul 30, 2010 3:59am EDT  --  Report as abuse
JuWan wrote:
that’s really good

Jul 30, 2010 4:01am EDT  --  Report as abuse
yangguizi wrote:
Those that complain about the economy but still buy junk imports from China and fill their cars up with gas to go on joy rides are the real cause of the economic chaos we have today. You can’t complain about what Obama is doing if you go to wallmart and buy cheap Chinese junk. Americans have to start saving their money and buy American when you do have to buy something.

Jul 30, 2010 4:35am EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

Full focus