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Recession risks up amid slow growth, debt limit talks

WASHINGTON — The economy is at risk of slipping into another recession.

It nearly stalled in the first six months of the year, the government reported Friday. Economic growth was feeble in the second quarter and practically non-existent in the first.

The new picture of an economy far weaker than most analysts had expected suddenly made a second recession a more serious threat — and the threat will rise if Congress can't reach a deal to raise the government's debt limit. "The only question now is, how much weaker could things get?" said Nariman Behravesh, chief economist at IHS Global Insight.

In April, May and June, the economy grew at a 1.3 percent annual rate, below expectations. And the government changed its growth figure for January, February and March to 0.4 percent, far below the estimate of 1.9 percent.

Combined, the first half of the year amounts to the worst six-month performance since the Great Recession officially ended in June 2009. Over the past year, the gross domestic product — the total output of goods and services in the United States, and the broadest measure of the economy's health — recorded actual growth of 1.6 percent.

Since 1950, year-to-year growth has dipped below 2 percent 12 times. Ten of those times, the economy was already in recession or soon fell into one, says Mark Vitner, senior economist at Wells Fargo Securities.

Normal economic growth is closer to 3 percent.

The dismal second-quarter report led economists to reduce their estimates for growth in the second half of the year. Capital Economics, which had expected the economy to grow 2.5 percent this year, now says 2 percent looks more likely.

High gasoline prices leave people with less money to spend on other goods and services. And not all spending on gas contributes to the U.S. economy because some of the money goes to oil-producing countries. GDP figures are also inflation-adjusted, so spending $1 more for a gallon doesn't mean $1 of additional help to the economy.

Manufacturing disruptions from the Japan earthquake, cuts in state and local governments, and tighter household budgets have weighed down the economy, too.

Add to those problems the uncertainty fanned by the political stalemate in Washington, with Republicans refusing to raise the federal government's $14.3 trillion borrowing limit unless Democrats agree to deep federal spending cuts on the GOP's terms.

Without an agreement, the Treasury Department says, the government won't have enough money to pay all of its bills after Tuesday. It will have to cut spending by about 40 percent and choose which programs and beneficiaries receive money and which don't. The U.S. Chamber of Commerce called on lawmakers Friday to be mindful of the weak economy.

"The recovery is clearly on a lower trajectory, and it will likely be some time before the economy rebounds to the point it will create much in terms of job growth," Martin Regalia, the group's chief economist, said in a statement.

That means, he said, "the stakes on the debt limit debate … are that much higher. With growth rates this low, even a small negative impact resulting from failure to increase the debt ceiling and defaulting on our obligations could turn the economy back into a recession."

While Republicans in the House of Representatives capture headlines by demanding steep spending cuts, the version proposed by Senate Democrats actually would thwart economic growth more, according to two economic research groups.

Macroeconomic Advisers, a leading forecaster, said Thursday that a rewritten plan offered by House Speaker John Boehner, R-Ohio, would shave more than a tenth of a percentage point off of growth next year, while the plan being pushed by Senate Majority Leader Harry Reid, D-Nev., would cause an even larger hit on growth in fiscal 2013 — shaving almost half a percentage point.

Some House Republicans backed by tea party groups demand even deeper front-end cuts, perhaps as much as $100 billion, arguing that politicians can't be trusted to keep their promises further out.

That would be dangerous, warned Mark Zandi, chief economist for forecaster Moody's Analytics. "I think the idea is a very serious policy error," he said. "This would be the fodder for another recession. The economy may be able to digest $25-30 billion more (in federal spending cuts) … but $100 billion, I don't think it could digest that."

Zandi, who's frequently cited by Republicans and Democrats alike, favors spending cuts "when the economy is off and running," but he cautions that "to add more fiscal restraint in the latter part of 2011 and 2012 would be a mistake."

The economy needs to expand so it can create jobs for a growing population. It must grow at a 2.5 percent annual rate to keep the unemployment rate from rising and at a 5 percent rate to bring unemployment down significantly.

Information from McClatchy-Tribune was included in this report.

Economic growth: worse than projected

Revised figures from the Commerce Department show that the 2007-2009 recession was deeper, and the recovery to date weaker, than originally estimated. The latest figures show that the nation's economy is about $56 billion smaller than it was in 2007, when the Great Recession officially began. Figures are in 2005 inflation-adjusted dollars.

Gross Domestic Product

2011 2nd quarter: $13.27 trillion

2007 4th quarter: $13.33 trillion

GDP annual growth rate

2011 Q2: 1.3%

2007 Q2 : 1.7%

Disposable personal income

2011 Q2: $32,630

2007 Q4: $32,801

Unemployment rate

June 2011: 9.2%

June 2007: 4.6%

Sources: Bureau of Economic Analysis; Bureau of Labor Statistics

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Recession risks up amid slow growth, debt limit talks 07/29/11 [Last modified: Saturday, July 30, 2011 3:23pm]
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