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U.S. growth falls short of forecasts

Boosted by exports and tax rebates, second-quarter GDP rises 1.9%. New data show a decline at the end of 2007.

August 01, 2008|Peter G. Gosselin | Times Staff Writer

WASHINGTON — The U.S. economy shrank at the end of last year, revised figures show, and although it resumed growing in the first half of this year -- mustering a 1.9% annual rate from April through June -- the expansion was weaker than most economists had expected.

Treasury Secretary Henry M. Paulson Jr. said Thursday that the first-half growth should be enough to keep the economy expanding for the rest of the year.

But most private forecasters disagreed, saying the comeback would probably prove to be the temporary result of distributing about $100 billion in tax rebates.

"The basic pattern is clear; this is becoming a W-shaped recession," said David Wyss, chief economist for Standard & Poor's in New York.

"The [economy's] decline got interrupted by the rebate checks, but it will go back to declining after people finish spending their checks," he said.

Separately, the Labor Department said Thursday that 448,000 Americans filed initial claims for unemployment compensation last week, the largest number in more than five years.

And the Bureau of Labor Statistics said that wages and salaries of American workers, adjusted for inflation, fell 1.7% in June from a year earlier, the fourth decline in the last five years.

The latest figures for the gross domestic product -- the broadest gauge of the nation's output of goods and services -- helped drive down stock prices as investors concluded that the economy was in worse shape than they had thought.

The Dow Jones industrial average closed down 205.67 points, or 1.8%, at 11,378.02.

The economy expanded at a 1.9% annual rate in the second quarter, up from 0.9% in the first quarter and a 0.2% rate of contraction during the final three months of 2007. Previously, the department reported a 0.6% growth rate for the period.

Although marking an improvement from the preceding quarters, the growth rate for the latest three months was considerably weaker than the 2.3% pace economists had predicted.

Consumer spending, which accounts for about 70% of GDP, rose at a 1.5% rate, less than expected, during the second quarter.

Analysts forecast that consumer spending would surge as Americans received their rebate checks and retailers sought to attract the money with price discounts.

And most economists don't think even the 1.5% rate can be sustained, especially if food and fuel prices continue rising and home prices keep falling.

In a speech in New York, Paulson acknowledged the country's troubles.

"The housing correction, credit market turmoil and high energy prices remain a considerable drag on the economy," he told the Exchequer Club.

But the Treasury secretary gamely repeated his prediction that the sharp decline in home prices would come to an end relatively soon.

"While home price adjustments will continue for some time, I believe we can move through the bulk of the correction in months, rather than years," he said.

Most economists are nowhere near as optimistic. They worry that the real estate doldrums could take years to play out and are concerned that high energy prices could push the country into a long, deep downturn.

"The economy continues to be very weak," said Sung Won Sohn, an economist at Cal State Channel Islands in Camarillo.

"It is too early to talk about it bottoming out and rebounding. The real danger is of the economy slipping further."

The GDP figures for the second quarter contained some positive news on trade, which made its largest contribution to U.S. growth since 1980. Imports of foreign goods fell at a steep 7% annual rate while exports of American goods climbed at an even steeper 9% pace.

"Trade is the really bright spot in the economy," said Nariman Behravesh, chief economist at Global Insight, a forecasting firm based in Waltham, Mass. "If you took trade out and looked at just the domestic economy, we're in a recession right now."

There was also some hint in the latest numbers that the worst of the housing crunch could be in the past. Although home construction continued to shrink in the April-through-June quarter, it did so at a slower pace.

Investment in residential structures fell at a nearly 16% rate, adjusted for inflation, but that was its smallest decline in a year. Residential investment is down nearly 40% from its 2005 peak.

Overall, analysts said, the economy's performance in the latest quarter was disappointing, boding poorly for the rest of this year and at least the early part of next.

"Whatever strength there was came from the tax rebates, from exports and from strong federal government spending," said Allen Sinai, chief economist with Decision Economics Inc. in New York.

"The economy," Behravesh said, "is in the upward leg of a W-shaped cycle, with the second dip imminent."


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