US revises down recovery rate

It would certainly be nice if "they" would keep the number straight the first time they issue them!

July 29, 2011

US revises down recovery rate

By Robin Harding (of ft.com – that’s the “Financial Times”) in Washington

A dramatic set of revisions to US growth data on Friday have revealed that the economy is recovering more slowly than previously thought from a much deeper recession.

The Bureau of Economic Analysis said that the economy grew at an annualised rate of only 1.3 per cent in the second quarter and revised down its estimate of first-quarter growth to only 0.4 per cent from 1.9 per cent.

But it also made annual revisions to its data that showed the recession of 2008 and 2009 was much worse than previously thought. Growth in 2008 was revised down to minus 0.3 per cent from flat while 2009 growth was revised down to minus 3.5 per cent from minus 2.6 per cent.

“For the recession as a whole, gross domestic product declined by 5.1 per cent rather than 4 per cent as previously reported, far and away the steepest economic decline since World War Two,” said William Seyfried, professor of economics at Rollins College.

The revisions mean that the sluggishness of the recovery is even more alarming. The economy would normally be expected to bounce back faster from a deeper recession, simply because there was more spare capacity to put back to work.

The revisions imply that the jobs market has been a much better guide to the true health of the economy than the initial growth numbers. The unemployment rate has remained stuck at 9.2 per cent, not far below its 10.1 per cent peak.

That reflects an economy that was $134bn smaller at the end of 2010 – almost a full percentage point – than the BEA had previously thought. The biggest reason for the revision was a large cut in the BEA’S estimate of consumption.

Looking forward, the data send mixed signals about whether the economy can bounce back strongly in the second half, as many economists forecast.

Consumption contributed only a 10th of a percentage point to growth in the second quarter, but that reflected a surge in oil prices and disruption to car supplies because of the earthquake in Japan, factors that should be reversed in the third quarter.

Business investment was encouragingly robust, contributing 0.7 percentage points to second-quarter growth, and there were hints that construction activity has hit bottom.

But government spending subtracted 0.2 percentage points from growth and that would have been even worse had it not been for strong defence expenditures. As the spending cuts under discussion in Congress bite, government is likely to knock even more off growth in the second half.

The danger now is that the economy has weakened to a point that will become self-reinforcing, with consumers and businesses so doubtful about the recovery that they further reduce their spending, undermining any rebound.

The economic weakness means that the timing for a possible debt limit shock could not be worse, and if there is another quarter of disappointment from the labour market, there are likely to be renewed calls for the Federal Reserve to step in with further monetary stimulus.