The US Bureau of Economic Analysis released a downward revision to its estimate of second quarter Gross Domestic Product this morning. They now estimate that the US economy expanded at a 1.0% annualized rate during the second quarter, down from 1.3% in their advance release
The primary factors leading to the downward revision were a decline in exports and an increase in inventory investment. The later is a result of business producing goods and services which do not sell during the quarter and are then counted as investment in inventories to be sold in the future.
Given the push towards austerity in Washington, it is important to note the drag on the economy already present due to cut backs in government spending. During the second quarter, government spending at all levels acted to reduce GDP growth by almost 1/5th of a percentage point. The biggest drag is coming from State and Local government spending (-.34) and non-defense Federal spending (-.21). Unfortunately, this drag on growth will continue in coming quarters.
Also today, the University of Michigan released its final estimate for consumer sentiment in August. While the estimate rose slightly from 54.9 to 55.7, it is down from 63.7 in July and is now at its lowest level since 2009. This large drop is almost certainly reflects how the political stalmate over debt talks contributed negatively to the economy during the month.
With the generally downbeat economic news, Federal Reserve chairman Ben Bernanke spoke this morning on “The Near-and Longer-Term Prospects for the U.S. Economy”. His speech confirms that the Fed is prepared to act if conditions warrant further monetary stimulus. In particular, the FOMC still believes that the US economy will strengthen a bit in the 2nd half of 2011, but is concerned about both the European sovereign debt crises and the turmoil in Washington surrounding the raising of the U.S federal debt ceiling. Finally, Bernanke argued that the Fed still has tools to provide monetary stimulus, but also called for additional fiscal stimuls. “Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not, as a consequence, disregard the fragility of the current economic recovery. Fortunately, the two goals of achieving fiscal sustainability–which is the result of responsible policies set in place for the longer term–and avoiding the creation of fiscal headwinds for the current recovery are not incompatible.”