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Steep decline in GDP growth raises alarms

Corporations flourish in the second quarter but won't for much longer if consumer spending remains weak, economists say.

July 31, 2010|By Don Lee, Los Angeles Times

Reaser and others said the good news was that the European debt crisis, which rattled financial markets, had eased and that business investment remained very strong.

Indeed, in the second quarter, the Commerce report showed, companies' investments rocketed 19.1% from the first quarter. That included a turnaround in outlays for buildings and a nearly 22% jump in spending for equipment and software.

But retail sales have softened and consumer attitudes have soured. On Friday, the University of Michigan reported that its index of consumer sentiment fell in July to its lowest level since last November.

But Ashworth said the latest report also offered some hopeful signs. He noted that a surge in U.S.

imports had a large negative effect on the overall GDP rate, which he sees as a

volatile component of the GDP calculations. Moreover, he and others said, although personal spending remains weak, many consumers are socking away more money.

While that may be harmful to the broader economy in the short run — the so-called paradox of thrift — it will help families improve their financial situations in the longer term.

Friday's report showed consumers saved an upwardly revised 5.5% of their after-tax income in the first three months of this year, and the personal savings rate rose to 6.2% in the second quarter, the highest since early 1993.

That savings rate means more consumers will be in a stronger position to make purchases as the slow recovery continues, said Alan Levenson, chief economist at mutual fund giant T. Rowe Price in Baltimore. "That's close to where we thought consumers needed to be to take them along in consumption," he said.

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