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Economic recovery hits brakes

There is no more disputing it: The economic recovery in the United States has indeed slowed.

The nation's economy has been growing for a year, with few new jobs to show for it. Now, with growth at an annual rate of 2.4 percent in the second quarter and federal stimulus measures fading, the jobs outlook appears even more discouraging.

"Given how weak the labor market is, how long we've been without real growth, the rest of this year is probably still going to feel like a recession," said Prajakta Bhide, a research analyst for the U.S. economy at Roubini Global Economics. "It's still positive growth — rather than contraction — but it's going to be very, very protracted."

A Commerce Department report Friday showed that the economy had grown at a faster pace earlier in the recovery, expanding at an annual rate of 5 percent at the end of 2009 and 3.7 percent in the first quarter of 2010. Consumer spending, however, was weaker than initially believed.

Many economists are forecasting a further slowdown in the second half of the year, perhaps around an annual rate of 1.5 percent. That is largely because businesses have refilled the stockroom shelves that they had whittled down during the financial crisis, meaning there will not be much need for additional inventory orders.

Fiscal stimulus policies are also expiring, which may further drag on growth. And individual stimulus programs like expanded unemployment benefits have faced huge political battles each time they have come up for extension in Congress.

Recent reports from Fed officials suggest the central bank has become increasingly worried about where the economy is headed.

The crucial driver of growth in the second quarter was nonresidential fixed investment, which covers items like office buildings and purchases of equipment and software. This sector rocketed up at an annual rate of 17 percent in the second quarter, compared with a 7.8 percent increase in the first. The equipment and software category alone grew at an annual rate of 21.9 percent, the fastest pace in 12 years.

"We're seeing a sort of hand­over from consumer spending to capital spending," said John Ryding, chief economist at RDQ Economics. "The consumer also looks to have saved more than we thought before, which means they're perhaps further on the road to financial adjustment than we thought they were previously."

Growth in consumer spending, which is usually a leading indicator of a recovery and which accounts for most economic activity in the United States, has been leveling off. It grew at an annual rate of 1.6 percent in the second quarter after an annual increase of 1.9 percent in the previous quarter. The personal savings rate in the second quarter was estimated to have been 6.2 percent of disposable income, significantly higher than the 4 percent that had been estimated earlier.

The fact that businesses seem to be investing more in equipment than in hiring may be a reason households have been reluctant, or perhaps unable, to pick up the pace of their spending.

"There are limits on the degree to which you can substitute capital for labor," Ryding said. "But you can understand that businesses don't have to pay health care on equipment and software, and these get better tax treatment than you get for hiring people."

Data revisions covering the last three years were also released on Friday. These showed that, over all, 2009 and 2008 were slightly worse than previously reported, but that the first quarter of 2010 was better.

As the global economy recovers, America's trade activity has picked up. But imports once again grew faster than exports last quarter, presenting a drag on growth. Imports spiked at an annual rate of 28.8 percent, the biggest jump in a quarter-century, compared with an annual increase of 10.3 percent in exports.

Economic recovery hits brakes 07/30/10 [Last modified: Friday, July 30, 2010 10:13pm]
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