US GDP

WASHINGTON (MarketWatch) — Gross domestic product expanded at a paltry 1.3% annual rate in the second quarter, the Commerce Department said Friday to mark the weakest six-month period since the recovery began.

Furthermore, first-quarter GDP was drastically revised downward to show just a 0.4% gain from the initially reported 1.9% improvement. And the recession proved to be deeper than initially projected. See related story about the recession.

Economists had forecast GDP, the inflation-adjusted, seasonally adjusted value of all goods and services produced in the United States, growing at a 1.6% rate in the second quarter.

nflation picked up steam in the second quarter.

The core personal consumption expenditure index, rose 2.1% in the second quarter, the fastest pace since the fourth quarter of 2009.

Analysts knew there was a chance that the portrait of the economy might change because the government report included revised growth estimates for the last three years.

Growth has averaged 2.5% over the past two years. This is not a strong enough pace to bring down the unemployment rate that is stuck above 9%.

Many analysts say the unemployment rate is the key to a second term for President Barack Obama.

Most economists expect growth to pickup in the second half and for inflation to moderate.

At the moment, the Blue Chip consensus forecast of economists expects GDP growth will accelerate to a 3.2% pace in the second half of the year.

On Thursday, Richmond Fed President Jeffrey Lacker described a “plausible” scenario in which the economy settled into trend growth of 3% without a “catch-up” performance, which would mean a long-lasting reduction in the level of economic activity.

Details

Consumer spending, the engine of the economy, slowed to rise 0.1% after rising at a 2.1% annual pace in the previous quarter. This is the smallest rise in consumption so far in the recovery.

Spending on durable goods fell 4.4% in the second quarter due to a sharp drop in auto sales. This was due in large measure to the lack of supply because of the Japanese earthquake. Spending on nondurable goods rose 0.1% in the second quarter, and spending on services increased 0.8%.

Business investments rose at a 6.3% annual rate in the second quarter. Investments in structures increased 8.1%, and investments in equipment and software rose at a 5.7% pace. Business fixed investment added 0.7 percentage points to growth.

Inventories increased by $49.6 billion. The change in inventories added 0.2 percentage points to growth.

Final sales, which exclude inventories, rose at a 1.1% rate in the second quarter after rising 0.1% in the first quarter.

Investments in housing increased at a 3.8% annual rate, the strongest gain in a year. Residential investments added 0.1 percentage points to growth after a fall of 0.1% in the first quarter.

Trade was also a positive factor in the second quarter after a 0.3 percentage point drop in the first quarter.

Exports rose 6.0%, reflecting a weaker dollar. Imports increased 1.3% in the quarter, resulting in a narrowing of the trade deficit.

Government spending fell at a 1.1% annual pace, the third straight quarterly decline. Spending by state and local governments fell 3.4%. Federal spending rose 2.2%, including a 7.3% rise in the volatile defense spending category. Government spending subtracted 0.2 percentage points from growth.

Separately, the Labor Department said compensation costs rose an annual 2.2% rate in the second quarter, driven by a 3.6% increase in benefits. Wages and salaries rose 1.6%.

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