GDP Revision: U.S. Economy Grew Just 1.0% in Second Quarter

The U.S. economy grew at a worse-than-expected one percent rate in the second quarter, the U.S. Commerce Department announced Friday, as lower export growth and a slowdown in inventory build-up slowed the world's largest economy to near-stall speed. What's more, the January to June 2011 period saw the weakest growth since the recovery started in mid-2009.

A Bloomberg survey had expected second quarter U.S. GDP to increase a revised 1.1 percent, after a very small 0.4 percent increase in the first quarter.

Export Growth Slows

In Q2, the rise in exports was revised to 3.1 percent from the initially estimated six percent. Inventories rose $40.6 billion, less than the initially estimated $49.6 billion.

Meanwhile, consumer spending increased 0.4 percent in the second quarter, better than the 0.1 percent initially released gain.

Also, corporate earnings increased three percent to $57.3 billion. Real disposable personal income, which adjusts for inflation, rose one percent in the second quarter, better than the 0.7 percent initial estimate.

In addition, the core personal consumption expenditure index -- an inflation gauge that excludes food and energy prices that's closely watched by the U.S. Federal Reserve -- increasedat a 2.2 percent annual rate.

In current dollar terms (not adjusted for inflation), U.S. GDP rose 3.5 percent in the second quarter or by $129.0 billion to an annual rate of $14.996 trillion. In the first quarter, current-dollar GDP increased 3.1 percent or by $112.3 billion

Further, while the second quarter GDP rise is a disappointment, it probably won't resolve the battle between the economic bulls and bears.

The bulls argue that although GDP has recorded only a minor rise in the past six months, the expansion remains intact, but barely, and they argue that with the worst of the financial crisis behind the nation, rising exports, better-than-expected corporate earnings, and decent manufacturing activity will eventually lead to stronger GDP growth and job growth.

Conversely, the bears argue that a slowing European economy stemming from the government debt crisis will hurt U.S. exports and combine with sub-par U.S. job growth and tepid consumer sentiment to further slow the economy in the second half of 2011, possibly tipping the economy into a double-dip recession.

Parties Differ Regarding How To Best Stimuluate Economy

Further the below-consensus second quarter GDP growth also probably won't resolve the debate in Washington between Republicans and Democrats concerning how best to get the U.S. economy to grow faster and create more jobs to lower the nation's high 9.1 percent unemployment rate.

Republicans argue that fiscal stimulus hasn't worked, and the answer lies in federal income tax cuts and less government spending to free-up money for the private sector. Most Republicans would also like to see a rollback of government regulations and programs, including the 2010 U.S. health care reform act.

Democrats, including President Obama, counter that the fiscal stimulus has worked -- it prevented a deeper recession -- and that its main flaw was that the stimulus wasn't big enough given the massive GDP hole created by the bursting of the housing bubble and accompanying financial crisis.

Economic Analysis: The revised one percent GDP growth rate, when combined with the first quarter's 0.4 percent tiny rise shows a U.S. economy at near-stall speed. Further, although U.S. Federal Reserve Chairman Ben Bernanke has undoubtedly made up his mind regarding whether to implement the third phase of quantitative easing, of QE3, prior to his Jackson Hole central bankers' conference speech Friday, the view from here argues the bad Q2 GDP statistic signals to the U.S./global stock market and bond markets that QE3 is coming: it's just a a question of when.