U.S. GDP Revised Up, but Economic Growth is Unlikely to Gain Momentum

After contracting by 6.4% in the first three months of the year, the U.S. economy shrank just 0.7% in the April-June period. But while many analysts believe growth resumed in the third quarter, any recovery will likely be hamstrung by high unemployment.

The U.S. Commerce Department revised its estimate of gross domestic product (GDP) to a 0.7% decline in the second quarter after earlier forecasting the contraction at 1%. The revision resulted from much smaller decreases in residential and nonresidential fixed investment, exports, and private inventory investment, as well as an increase in government spending.

Real federal government consumption expenditures and gross investment increased 11.4% in the second quarter, compared to a 4.3% drop in the first three months of the year.

For the July-Sept. period, many analysts believe the economy expanded at a pace of about 3%-4%, thanks in part to the U.S. governments Car Allowance Rebate System (CARS), popularly known as Cash for Clunkers.

"Growth should be solidly positive," Mark Vitner, an economist at Wells Fargo & Co. (NYSE: WFC) told The Associated Press.

However, there is also cause for caution, as temporary government programs like Cash for Clunkers and the government's $8,000 first-time homebuyer tax credit, might have spurred third-quarter car and home sales by "stealing" growth from future quarters.

If that's the case, the recovery could be tumultuous. For example, Allen Sinai, founder of forecasting firm Decision Economics, expects third-quarter GDP to grow at a healthy 4% rate, but sees the fourth quarter slowing to 1.8%, The Wall Street Journal reported. Morgan Stanley (NYSE: MS) economists see an even bigger swing, from 4.5% to 1.5%.

High unemployment will almost certainly be the biggest hurdle for the economy to overcome. Employers shed 216,000 jobs in August, and the unemployment rate swelled to 9.7%. Many economists believe the rate rose to 9.8% in September and could climb as high as 10% by the end of the year.

An ADP Employer Services (Nasdaq: ADP) report based on payroll data showed that U.S. companies cut 254,000 jobs this month, more than forecast.

"The state of the labor market is still very weak," Julia Coronado, senior U.S. economist at BNP Paribas told Bloomberg News. Job losses are "weighing on wages and income," she said, and "still a headwind to growth."

News and Related Story Links:

  • The Associated Press:
    Economy dips at 0.7 percent pace in 2Q