US economy grows sluggish 1.7% in Q2

WASHINGTON, USA – The US economy grew 1.7% in the second quarter, picking up steam from the first quarter, the Commerce Department reported Wednesday, July 31.

The 2nd quarter gross domestic product growth, while better than the 1.1% expected, showed the world’s largest economy remained stuck in the doldrums 4 years after exiting the Great Recession.

But GDP revisions to prior quarters revealed a clear trend higher that some analysts said fits with the Federal Reserve’s view that growth will pick up in the second half of 2013.

The better-than-expected report came as the central bank’s policy-setting committee met for a second and final day in Washington. 

According to the revisions, GDP growth nearly stalled at 0.1% in the 2012 fourth quarter, and rose 1.1% in the first quarter, not the 1.8% pace previously estimated.

“Rather than slowing in the second quarter as expected, new and revised GDP data show an acceleration in growth, although from a weaker point than previously thought,” said Scott Hoyt of Moody’s Analytics.

Hoyt pointed to mixed forward-looking indicators, noting expectations for faster consumer spending and residential investment growth.

“The US economy appears to be moving forward gracefully despite raging fiscal headwinds. The tax increases and government spending cuts, which will lower GDP by an estimated 1.5 percentage points this year, have done less damage than expected,” he said.

Analysts were divided on whether the economic data were strong enough for the Fed to begin to taper its massive asset-purchase program, known as quantitative easing.

The Federal Open Market Committee has signaled it would begin to wind down the $85 billion-a-month asset-purchase program if the economy continued to improve.

The FOMC’s post-meeting statement was expected to announce no change in monetary policy direction — holding interest rates near zero — but provide insights into the plan to wind down the asset purchases.

With the Fed’s key federal funds rate at a rock-bottom 0% to 0.25% since December 2008, the central bank has turned to a third round of open-ended QE to tamp down longer-term interest rates. Historically low mortgage rates have spurred the recovery in the housing market recovery, a rare bright spot in the sluggish economy.

Some analysts expect the FOMC will begin to taper the asset purchases as early as the FOMC’s next meeting in mid-September.

“We expect the Fed to begin tapering of QE3 in September. Rate hikes, on the other hand, remain off,” said Harm Bandholz of UniCredit Economics.

Jim O’Sullivan, chief US economist at High Frequency Economics, agreed, despite the mixed GDP report.

“We still expect they will move a step closer to tapering today,” O’Sullivan said.

Joel Naroff of Naroff Economic Advisors argued the economy lacks the momentum for the Fed to ease its foot on the pedal.

“If you look at the past 3 quarters, the economy has not done very much. That is the economic environment facing the Fed as it meets today, Naroff said.

“It is clear that many members want to taper or even end quantitative easing as soon as possible. This report doesn’t provide the economic basis to do that.”

The report revealed a slowdown in consumer spending, which accounts for two-thirds of US economic activity.

Personal consumption expenditures increased only 1.8% after a 2.3% rise in the first three months of the year.

Nonresidential fixed investment rebounded and a build-up in private inventories added 0.41 percentage point to growth.

The drag caused by federal government spending and investment cuts narrowed, falling 1.5% after a more than 8% drop in the first quarter.

“The most important thing today’s data tells us is that the US economy continues to grow far too slowly to reliably improve job prospects; it remains far from healed from the Great Recession, and the root problem remains deficient demand — a problem exacerbated by austerity,” said Josh Bivens of the Economic Policy Institute. – Rappler.com