The recession was deeper than the U.S. government thought, according to revisions in a report issued by the Commerce Department on Friday. Consumption growth was consistently weaker over the past couple of years, and the economy shrank 2.6 percent last year, the steepest drop since 1946 and worse than the 2.4 percent decline originally estimated. This may help explain why unemployment surged to 10.1 percent, a 26-year high in October 2009.
For all three years, consumers spent less and homebuilders cut more deeply than previously thought—helping to explain downward economic revisions. The data shows the economy slid into its worst recession since the Great Depression.
The only silver lining: Households appear to be saving a lot more than economists previously thought, said Paul Dales of Capital Economics. The savings rate in the second quarter is now estimated to have been 6.2 percent of disposable income, significantly higher than the 4 percent from earlier estimates.
Also in the report was second-quarter data for gross domestic product, the value of all goods and services produced in the United States. The good news: The economy is continuing to expand. The bad news: It’s at a much slower rate of 2.4 percent than forecasted.
“Economic growth slowed due to a much smaller boost from inventory rebuilding and an enormous spike in imports,” Dales said.
“Much Work Remains To Be Done”
In a blog post on Friday morning, Christina Romer, White House Chair for the Council on Economic Advisers, noted, “Faster growth is needed to bring about substantial reductions in unemployment. Much work clearly remains to be done before the U.S. economy is fully recovered.”
Monthly data indicators such as the recently low consumer confidence reading, household spending, unemployment rates and business investments reveal a pattern of decline and further support data from the Commerce Department. Growth was strong early in the second quarter, and the economy then seemed to lose some momentum in May and June, said Karen Dynan, co-director of the economic studies program at the Brookings Institution, a D.C.-based think tank.
“We are looking at a recovery that isn’t as robust that people were hoping for,” Dynan said. “The most likely outcome is that the economy will continue to grow and recover.”
Some economists point out that while the economy has been sluggish over the past year, growth began with the disbursement of the $787 billion stimulus package. The new GDP report shows that even with stimulus spending growth is decelerating and will not provide a boost in the last quarter for 2010, said Josh Bivens, an economist with the Economic Policy Institute.
“Today’s report provides near certainty that very high unemployment rates will, absent aggressive action by policymakers, plague the economy for years to come,” Bivens said.
Incoming data for unemployment figures are due out next Friday. “This will be a really big deal,” Dynan said.
A government official said the Federal Reserve should revive a crisis-era program to buy government debt if the economy continues to plunge and is headed for a bout of deflation. The Fed hasn’t confirmed if it will change the direction of its policy, but last week Federal Reserve chairman Ben Bernanke spoke of an “uncertain” economic outlook. He said the Fed is “prepared to take further policy actions” if the recovery begins to stall.
The weak economic growth report also triggered stocks on Wall Street to fall an average of 52 points.
The AP contributed reporting.
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