Bleak outlook for economy as growth slows

[July 31, 2010]  WASHINGTON (AP) -- The economy is still growing, just not by much. And until that changes, don't look for the jobs to come back.

Americans spent less and businesses thought twice about restocking their shelves in the past three months, making for a sluggish spring. And the government now says the recession was a deeper hole to climb out of than previously known.

The gross domestic product, the broadest measure of U.S. economic output, grew at an annual rate of 2.4 percent from April to June, down from 3.7 percent the quarter before and the weakest showing in nearly a year. Many economists say the economy is growing even more slowly now.

"The economy has lost some steam," said Sung Won Sohn, an economist at California State University, Channel Islands. "Some of the pistons in the engine are sputtering, and economic momentum is slowing."

Even the good news for the economy this spring came with an asterisk. Home builders, for example, increased their spending at the fastest pace in 27 years. But economists say that was likely a one-time event propelled by a now-expired tax credit for homebuyers.

Companies also invested in equipment and software this spring at the fastest pace in 13 years. And they are expected to keep up that spending. But even that won't be enough to invigorate the rebound. And some spending on equipment that increases productivity actually makes it easier for companies to do without more workers.

Uncertain about the strength of the recovery, companies are sitting on record piles of cash, loath to use the money to hire new workers and expand operations.

Caterpillar Inc., Dupont Co. and Microsoft Corp. are among companies reporting strong second-quarter earnings in the past two weeks yet they aren't ready to bulk up their work forces.

With the fall elections looming, Republicans in Congress and some Democrats have shown little inclination to pass additional stimulus measures that would add to the deficit in order to speed up the recovery.

The Federal Reserve is exploring new steps to bolster the recovery in case the economy flashes danger signs of sliding back into recession or of a dangerous bout of deflation.

Policymakers could cut the interest rate paid to banks on money parked at the Fed to zero. They could also promise to keep rates at record lows for longer, or revive programs to buy mortgage securities or government debt.

The economy has now grown four quarters in a row, but economists still fret about the possibility that it will slip into a recession again -- the dreaded "double dip."

"The odds are we'll muddle through without backstepping into recession," said Mark Zandi, chief economist at Moody's Analytics. "But the odds are uncomfortably high that I'm wrong."

Investors at first reacted to the GDP report with disappointment but seemed less concerned as the day wore on, particularly when a reading on consumer sentiment came in higher than expected. The Dow Jones industrial average closed virtually unchanged.

The report also showed that the economy grew faster early this year than initially thought. The 3.7 percent annual rate of growth from January through March is up from first estimates of 2.7 percent. But those gains are in the past.

The economy began to grow in the third quarter of last year after having suffered the worst recession since the Great Depression. And in the final quarter of 2009, the economy surged at a 5 percent pace. That was the high point of the rebound so far.

Much of the expansion was powered by the government's $862 billion stimulus package of tax cuts and spending. Also, companies helped energize growth with a burst of spending to replenish inventories that had been cut down during the recession.

Now those forces are fading. As they do, doubts are growing about whether the private sector alone can sustain the recovery. Businesses have not been adding enough jobs to keep up with population growth, and unemployment is stuck near 10 percent.

People seem to be squirreling money away, perhaps because their homes are worth less these days, said Bill Gullickson, chairman of McLaughlin, Gormley King Co. of Minneapolis, which makes insecticides. He has no plans to add to his work force of about 100.

"A lot of people feel poor, and they are acting that way. Times are tough," he said.

Consumer spending, usually the lifeblood of the economy, is rising at only an anemic rate. Instead, Americans are saving more of their disposable income now than they have in about a year.

"I think we're sort of stuck," Robert Steinkrauss said Friday as he headed to work in New York. "You hold off on purchases, you hold off on vacations so everybody is in sort of a wait and see mode."

The federal government increased its spending at the fastest pace in a year. But economists expect that growth to slow, too. And state and local governments are grappling with historic budget shortfalls.

In the revisions issued Friday, the government estimated the economy shrank 2.6 percent last year. That's worse than the 2.4 percent decline originally estimated. Both cases represented the sharpest economic contraction since just after World War II.

It takes about 3 percent growth in gross domestic product just to create enough jobs to keep pace with population growth. And economic growth would have to equal 5 percent for a full year to drive the unemployment rate down by a single percentage point.

The government will revise its estimates for second-quarter economic growth twice. The first estimate is missing final figures on trade and how much businesses invest in their inventories.

[Associated Press; By JEANNINE AVERSA]

APTN newsman David R. Martin in New York contributed to this report.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.