US Economy: Weaker Than Thought

There's no way to hide the unpalatable fact: the US economy, the world's biggest, has stalled and prospects of a slide into recession can't be dismissed, especially if the debt ceiling remains unresolved.

A shock revision in first quarter growth, which saw the rise in GDP slashed from the previously reported 1.9% to just 0.4 % annual (or from around 0.5% to just 0.1%, quarter on quarter), stunned markets on Friday night our time.

It overshadowed the first estimate of second quarter growth of 1.3%, under the 1.6% forecast (which was 1.9% a week earlier and 2.5% a month ago) and raised fears that the next two readings could see a big downward revision and a possible slide into the red.

If it hadn't been for the stupid argument over the debt ceiling, the argument now would be whether the US Federal Reserve should be taking new steps to boost the economy, including another round of bond purchases (or quantitative easing).

On top of the weak reading fore the first half of 2011, the report revealed that the solid 3.1% growth in the 4th quarter of 2010 had been cut to 2.3% annual.

And revisions to GDP figures going back to 2003 showed that the 2007-2009 recession took a bigger bite out of the economy than previously estimated.

Instead of the 4.1% estimated fall in GDP in the recession from fourth quarter of 2007 to the second quarter of 2009, US Government economists now put the fall at a nasty 5.1%, making the slump the bitterest recession America has had since The Great Depression in the 1930's.

As a result of the revisions, the slow recovery left GDP at $13.27 trillion in the second quarter, below the $13.33 trillion peak of the fourth quarter of 2007, after a recession that was about 25% deeper than previously reported.

The weaker-than-expected second-quarter figure and the revisions from late 2010 onwards underlined just how weak the US economy has become this year and explain the shock rise in unemployment to a new high of 9.2% in June.

The July jobs data is out this Friday night in the US and there are now fears that estimates for 100,000 new jobs last month (but no change in the jobless rate) might prove to be too optimistic.

Consumer spending, which accounts for about 70% US economic activity, slowed sharply in the second quarter, advancing at only a 0.1% -- the weakest since the recession ended two years ago.

As a result of the GDP figures, US economists have slashed growth forecasts for the rest of the year.

Marketwatch reported that Deutsche Bank lowered its third-quarter growth estimate by a percentage point to 2.5% and cut its fourth-quarter estimate to 3% from 4.3%.

IHS Global Insight said third-quarter growth will be probably less than 2% and possibly less than 1% vs. its prior 3.4% forecast.

Capital Economics said a 2% third-quarter view is "more plausible" than its prior 2.5% forecast.

"Previously, we highlighted the possibility that the economy was on the brink of a growth recession - a sustained period of below trend growth typically accompanied by rising unemployment," said the Deutsche Bank economists.

"The disappointing Q2 GDP results and downward revisions to the prior three quarters lead us to believe that this indeed is the case."

Under the revised data, GDP fell 0.3% in calendar 2008, weaker than the prior estimate of a flat reading.

And for 2009 the fall was revised to 3.5%, much deeper than the previous estimate of a 2.6% decline.

The economy grew a little faster in 2010 than previously estimated, rising 3% compared with the prior estimate of 2.9%, but it slowed sharply in the 4th quarter.

A bit of history: In the final quarter of 2008, when Lehman Brothers collapsed and markets froze (and President Barack Obama won the election), the economy was in freefall, slumping at an annual rate of 8.9%.

This was following by a drop of 6.7% in the first three months of 2009.

Growth in the fourth quarter of 2009 was cut to a 3.8% annual from the boom like 5.0% estimate in previous reports.

The revisions also showed weaker income growth.

Disposable income adjusted for inflation grew at an average annual rate of 0.6% between 2007 and 2010, half the previous estimate of 1.2% a year.

But it wasn't all gloom, if we assume that the 1.3% second quarter estimate remains in place, then there has been a rebound of sorts from the March quarter.

The US Commerce Department explained:

"The increase in real GDP in the second quarter primarily reflected positive contributions from exports; nonresidential fixed investment, private inventory investment, and federal government spending that were partly offset by a negative contribution from state and local government spending.

"Imports, which are a subtraction in the calculation of GDP, increased.

"The acceleration in real GDP in the second quarter primarily reflected a deceleration in imports, an upturn in federal government spending, and an acceleration in nonresidential fixed investment that were partly offset by a sharp deceleration in personal consumption expenditures."

The increase in Government spending was in defence, which may not be repeated. Defence spending will be cut over the couple of years as the fighting in Iraq and Afghanistan slows.

US economists point out that the Federal contribution will turn negative in coming months, especially if the debt ceiling/spending trade off its resolved and there are budget cuts.

Better news though from Japan on Friday.

Industrial production again rose in June, but not at the level forecast, inflation remains positive, retail sales rose strongly, but unemployment dipped slightly.

The seasonally adjusted June unemployment rate was 4.6%, according to the country's the Ministry of Internal Affairs said. That was up from 4.5% in May and doesn't include data from the disaster zone along the north east coast.

Industrial production rose 3.9% from a year earlier, down from the 4.3% seen a month ago in the survey.

It was also down on the 6.2% jump in May as industry (led by cars and electronics) boosted production.

The government expects the production to raise rise 2.2% in July and 2.0% in August. For the quarter through June, the index dropped 4.0%.

The June core consumer price index, which excludes volatile fresh food prices, was 0.4% higher than in June 2010, easing from May's 0.6% rise. but the index was down 0.2% from May.

And Japanese retail sales rose 1.1% in June from the same month in 2010. That was a solid rebound from the 1.3% fall in May.

Part of the rise was attributed to an increase in machine sales.

Clothing and food and beverage sales also rose during the period, while car and general merchandise sales declined.

And output of cars, trucks and buses in Japan dropped by 13.9% from June 2010. That's around half the size of the fall in May.

Vehicle output fell to 742,431 vehicles in June, down from 862,105 vehicles in the same month a year earlier, the association said.

Domestic vehicle demand totaled 351,828, down 21.6%.

All this has led Japan's Finance Ministry to upgrade its assessment of the state of the economy for the first time in 4 quarters, due to a recovery in supply chains since March 11th.

The ministry said the economic situation remains severe due to the effects of the March disasters, but signs of an upturn are emerging.

The ministry said the situation needs to be monitored carefully in coming months because the economy faces a shortage of electricity and other risks.