Economy’s spring rebound was less energetic

updated 12:19 p.m. ET Sept. 26, 2008

WASHINGTON - The economy’s spring rebound turned out to be slightly less energetic than the government previously thought. And, the road ahead is likely to be rocky as the country gets pounded by the worst financial crisis in decades.

The Commerce Department reported Friday that gross domestic product, or GDP, increased at a 2.8 percent annual rate in the April-June period. That wasn’t as strong as the 3.3 percent growth estimate made a month ago.

But it did mark a pickup after two terrible quarters. The economy barely grew in the first quarter — advancing at a feeble 0.9 percent pace. In the final quarter of last year, the economy actually shrank.

Nonetheless, the lower reading for second-quarter GDP surprised economists who had been expecting the government to stick with the 3.3 percent growth estimate.

The main reasons behind the downgrade: consumer spending and U.S. exports didn’t grow as much during the spring as previously thought. Yet export growth was still very brisk, a key factor keeping the economy afloat. And, consumers were helped out by the government’s tax rebates.

GDP measures the value of all goods and services produced within the U.S. and is the best barometer of the country’s economic health.

Since the spring, the economy has lost traction.

“The latest tightening of the credit crunch will hit an economy that was already deteriorating sharply,” said Nigel Gault, economist at Global Insight.

In the past week alone, the clogging of the nation’s credit arteries had become so bad that the Bush administration proposed a $700 billion financial bailout to Congress in a desperate bid to stem the fallout.

Despite marathon negotiations between congressional leaders and the administration to hash out a deal, the package is in limbo. Angry Republicans are balking even as President Bush made a fresh appeal on Friday to move swiftly. “There is no disagreement that something substantial must be done.”

On Wall Street, the Dow Jones industrials slid in morning trading as investors fretted over the bailout logjam and the collapse of Washington Mutual, the country’s largest thrift. Federal regulators seized the institution and struck a deal to sell much of its operations to JPMorgan Chase & Co.

GOP presidential nominee Sen. John McCain and his Democratic rival, Sen. Barack Obama, were summoned to the White House and have scrambled to assure the public they are on top of the nation’s economic and financial problems.

Federal Reserve Chairman Ben Bernanke earlier this week told Congress that failing to enact the bailout could drive unemployment and foreclosures even higher and push the economy into a recession.

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The economy already is faltering. It will lose momentum during the second half of this year, Bernanke told lawmakers. Consumers have clamped down and slowdowns overseas are sapping demand for U.S. exports, he said.

Businesses in turn are hunkering down and cutting back on hiring. The nation’s unemployment rate jumped to 6.1 percent in August, a five-year high. So far this year, a staggering 605,000 jobs have vanished. The economy needs to generate more than 100,000 new jobs a month for employment to remain stable.

A growing number of analysts predict the economy will shrink in the final quarter of this year and in the first quarter of 2009 as the mounting damage of the housing, credit and financial debacles take their toll on the country.

“The bailout plan ... should not be seen as a means of avoiding recession, but as a way reducing its severity,” Gault said.

In the spring, consumers — armed with tax rebates — boosted their spending at a 1.2 percent pace. That was down from the 1.7 percent growth rate previously reported for the second quarter, but was an improvement from the 0.9 percent growth rate in the first three months of the year.

Exports grew at a 12.3 percent pace in the spring. That was down from a previous estimate of a 13.2 percent growth rate, but marked a big pickup from the first quarter’s 5.1 percent pace.

One of the country’s biggest problems — the housing collapse — was evident in the GDP report.

Builders cut back at an annual rate of 13.3 percent in the second quarter. Still, that was a better showing than early this year and late last year.

An inflation gauge tied to the GDP report showed prices — excluding food and energy — rose at a 2.2 percent pace in the second quarter.

Although that was down from a 2.3 percent growth rate in the first quarter, it still remained outside the Federal Reserve’s comfort zone.

The Fed in June halted its most aggressive rate-cutting campaign in decades to shore up the economy out of concern that additional rate reductions would worsen already-high inflation. The Fed last week agreed to again hold its key rate steady at 2 percent, despite all the turmoil in financial markets and the broader economy. Some analysts believe the problems may force the Fed to do an about face later this year and cut rates again.

However, Richard Fisher, presidential of the Federal Reserve Bank of Dallas, said another rate cut wouldn’t do any good. “A rate cut was not, and is not, the cure for an economy where many banks cannot expand their balance sheets, or must shrink their balance sheets, because of capital constraints,” he said Thursday evening.

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