The government reported this morning that GDP expanded at a slower pace than expected, raising fears that the fragile economic recovery might stall.
Advance data from the U.S. Commerce Department revealed that GDP in the second quarter grew by at an annualized pace of just 1.3%, below the estimate of 1.9% offered by Bloomberg.
Adding to the gloomy tone of today’s report, Q1 GDP was revised downward from 1.9% to a meager 0.4%.
Much of the weakness came from consumers, as consumer spending, which makes up 70% of economic activity, practically came to a screeching halt during Q2.
The anemic growth rate, coupled with weak job growth, has to be setting off alarm bells at the Federal Reserve.
Fed Chairman Ben Bernanke believes that growth will accelerate later in the year, but he has admitted that the economic outlook is unusually uncertain and has hinted that a third round of QE is a possibility.
But there are limits to monetary policy. The Fed recently completed $600 billion in Treasury purchases, which has had little impact on real output as evidenced by today’s numbers.
Further bond buys would likely have a diminishing return on economic output; however, additional liquidity would probably increase speculative distortions in the economy, weaken the dollar and bolster already high commodity prices.
Based on the recent downward revision in the data, coupled with rising unemployment, the economy is very close to what could realistically categorized as a growth recession, but an outright contraction this year will probably be avoided.
Japan’s manufacturing base has started to recover following the tragic earthquake that rocked the country earlier in the year. That will aid U.S. manufacturing, which is dependent upon components from Japan.
Oil prices are off highs, and jobless claims, though elevated, are stable.
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