NEW YORK (Reuters) - The U.S. economy grew much less vigorously than previously thought during the second quarter and the snowballing financial crisis damped a rebound in consumer sentiment this month.
The latest evidence of the precarious state of the economy came on Friday as lawmakers in Washington wrangled over a $700 billion plan to rescue a financial system teetering on the brink of collapse.
The Commerce Department said gross domestic product, the measure of total goods and services output within U.S. borders, expanded at a 2.8 percent rate from April to June, rather than the 3.3 percent rate it estimated a month ago.
The Reuters/University of Michigan Surveys of Consumers said its final consumer sentiment index reading slipped to 70.3 from 73.1 in early September -- its worst slide within a single month since August 2005, when Hurricane Katrina caused widespread dislocation.
“The financial crisis has people worried,” said Carl Lantz, U.S. interest rate strategist at Credit Suisse in New York.
“The consumer was in big trouble anyway -- no access to credit, real income falling.... The third and fourth quarter are shaping up to be pretty weak in GDP terms, especially on the consumer side.”
The consumer sentiment index was still the highest since February this year but it came during a month in which the government seized control of mortgage finance companies Fannie Mae and Freddie Mac and Wall Street investment bank Lehman Brothers Holdings Inc filed for bankruptcy.
Growth in consumer spending was weaker than first estimated, pulling down the estimate of overall growth, while businesses made bigger cuts to investments, a sign confidence was sagging even before financial market turmoil deepened.
Investors paid scant attention to the day’s economic data, though, with the bailout negotiations and the biggest bank closure in U.S. history roiling global markets.
U.S. regulators seized bank Washington Mutual Inc (WM.N) Thursday, selling its assets to JPMorgan Chase & Co (JPM.N). Stocks on Wall Street .DJI fell but trade was volatile as some traders clung to hopes that the government would manage some kind of bailout for the beleaguered financial system.
Government bonds, which usually benefit from signs of economic weakness, were higher on the day.
“Honestly the data is not having much impact,” said Lantz, at Credit Suisse in New York.
U.S. President George W. Bush has warned the country faces a painful recession without a bailout and, on Friday, he sought to calm markets in a brief appearance at the White House.
“We are going to get a package passed,” Bush said. “We will rise to the occasion. Republicans and Democrats will come together and pass a substantial rescue plan.”
Before the financial sector’s latest downward spiral, the economy was already struggling under the weight of high energy costs, eight months of job cuts throughout the United States and the worst housing slump since the Great Depression.
The GDP data is generally considered backward-looking, given the fragile state of the economy, but it also says nothing good about the months ahead.
“I‘m afraid that the real economy is unraveling very quickly,” said Nigel Gault, chief U.S. economist for Global Insight in Lexington, Massachusetts. “Growth may be between zero and 1 percent in the current (third) quarter. I think we’ll be negative in the fourth quarter.”
Businesses appeared to be growing more wary about economic prospects in the second quarter. Spending on equipment and software, typically made when companies are planning production increases, shrank at a 5 percent rate rather than the 3.2 percent rate previously estimated.
It was the second straight quarter in which equipment and software spending contracted and was the steepest for any quarter since the beginning of 2002.
Personal spending, which fuels two-thirds of U.S. economic activity, grew at a revised 1.2 percent rate instead of the 1.7 percent previously estimated, partly because spending for costly items like cars contracted more sharply. Analysts expect consumers to keep retrenching as job losses mount and doubts grow about whether the economy can stay out of recession.
The University of Michigan index hit a 28-year low in June but had been improving since then, due mainly to a retreat in oil prices.
Worries over inflation moderated this month, with readings on one- and five-year inflation expectations falling to their lowest in six months. However, they did not fall as much as previously thought as oil prices have found some support from supply disruptions caused by Hurricane Ike.
Additional reporting by Lucia Mutikani in New York and Glenn Somerville in Washington; Editing by James Dalgleish