The broadest measure of the economy, known as the gross domestic product, grew at an annual rate of less than 1 percent in the first half of 2011, the Commerce Department reported on Friday. The figures for the first quarter and the second quarter, 0.4 percent and 1.3 percent respectively, were well below what economists were expecting, and signified a sharp slowdown from the early months of the recovery.
The government also revised data going all the way back to 2003 that showed the recession was deeper, and the recovery weaker, than initially believed.
“There’s nothing that you can look at here that is signaling some revival in growth in the second half of the year, and in fact we may see another catastrophically weak quarter next quarter if things go wrong next week,” said Nigel Gault, chief United States economist at IHS Global Insight, referring to the debt ceiling talks.
With so little growth, the economy can hardly withstand further shocks from home or abroad, and worrisome signals continue to emanate from heavily indebted European countries.
If the domestic economy were to contract, any new recession would originate on President Obama’s watch — unlike the last one, which began a year before he was elected.
If Congress leaves existing budget plans intact, some of the government’s economic assistance, like the payroll tax cut, will phase out and thereby act as a drag on growth.
And by many economists’ thinking, whatever additional budget cuts Congress eventually agrees to (or does not) will weaken the economy even further.
On the one hand, if legislators cannot come to an agreement to raise the debt ceiling by Tuesday, the United States may be unable to pay all its bills. Borrowing costs across the economy could then surge, because so many interest rates are pegged to how much it costs the federal government to borrow. The forecasting firm Macroeconomic Advisers has predicted that the resulting financial mayhem would most likely plunge the economy back into recession.
On the other hand, if legislators do reach an agreement, it will probably include austerity measures that could chip away at the already fragile recovery. Spending cuts — particularly if they take effect sooner rather than later, as some of the House’s more conservative members want — will weaken the economy, since so many industries and workers are directly or indirectly dependent on government activity.
Macroeconomic Advisers has estimated that the plan of Senator Harry Reid, the Nevada Democrat who serves as majority leader, for example, could shave a half a percentage point off growth as its spending cuts peak.
Citing the debt reductions that Congress undertook in 1937 and that ushered in the most severe phase of the Great Depression, some economists fear that imposing austerity measures too soon could likewise result in a recessionary relapse.
Simply prolonging the debt negotiations could also damage prospects for growth in the third quarter, as businesses and families wait to make big purchases until the threat of a federal default subsides.
“The business and consumer uncertainty over whether the government will be able to pay its bills is the biggest thing weighing around our neck right now,” said Austan Goolsbee, the departing chairman of the President’s Council of Economic Advisers.
The economy is smaller today than it was before the Great Recession began in 2007, though the country’s labor force and production capacity have grown. The outlook for digging out of that hole is getting weaker by the day, and analysts across Wall Street have already begun slashing their forecasts for output and job growth for the rest of this year. Usually, a sharp recession is followed by a sharp recovery, meaning the recovery growth rate is far faster than the long-term average growth rate; last quarter, though, output grew at less than half of the average rate seen in the 60 years preceding the Great Recession.
Particularly distressing to economists is that consumer spending — which, alongside housing, usually leads the way in a recovery — has been extraordinarily weak in recent quarters. Inflation-adjusted consumer spending in the second quarter barely budged, increasing just 0.1 percent at an annual rate, the Commerce Department report showed.
“People are spending more, but that spending is being absorbed in higher prices, not in buying more stuff,” said John Ryding, chief economist at RDQ Economics.
Even the brightest parts of the latest report were bittersweet. For example, motor vehicle output fell much less than was predicted after the natural disasters in Japan disrupted supply chains. But that means there will probably be a less buoyant bounce in coming months in autos, which economists were counting on to raise growth rates later this year.
Some economists cautioned not to read too much into this figure, though, or any individual quarterly number from the last report. The Commerce Department will probably make substantial revisions to the latest numbers, just as it did on Friday for the data released over the previous decade. Among the more jarring revisions in its latest report was the downgrade for growth in the first quarter of this year, from the original estimate of a 1.9 percent annual growth rate to a rate of just 0.4 percent.
“Sometimes it feels like I’m a physicist who’s been flipped into a different universe trying to explain these revisions, rather than an economist tracking output growth,” said Mr. Ryding. “The economy is clearly performing poorly, though we don’t know quite how poorly because these individual quarterly revisions can sometimes be something of a joke.”
The slow growth rate is largely responsible for stubbornly high joblessness across the country. Businesses are sitting on a lot of cash, but are still reluctant to hire because there is so much uncertainty about the future of the economy and whether they will continue to have a steady flow of customers. As of June, 14 million Americans were actively looking for work, and the average duration of unemployment has been climbing to record highs month after month.
Slow growth takes not only a human toll, but a fiscal one. Tax revenues do not expand enough to pay down the nation’s debt.
Given some festering inflation concerns, it also seems unlikely that the Federal Reserve will swoop in with another round of monetary easing to invigorate the economy.
“There’s not going to be additional monetary stimulus, and it’s hard to imagine any fiscal stimulus given the current discussion in Washington,” Mr. Ryding said. “So what’s going to get us out of this? The inevitable conclusion is time, and that’s not very satisfactory.”
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