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US Q2 growth revised down on softer spending

The US economy grew less strongly than previously thought during the second quarter as consumers boosted spending less vigorously and businesses trimmed some investments, a sign confidence was sagging even before financial market turmoil deepened.

The Commerce Department said on Friday Gross Domestic Product, the measure of total goods and services output within US borders, expanded at a 2.8% rate in the April-June second quarter rather than the 3.3% rate it estimated a month ago.

The new evidence of fading economic activity came amid confusion in Washington about whether a plan to bail out US financial firms by having the government use $700-billion of tax money to buy their bad debts can be revived. President George W. Bush has warned the country faces a painful recession if it is not.

While GDP growth was ahead of the first quarter's 0.9% rate, economists surveyed by Reuters had forecast the second-quarter pace would be unchanged rather than revised down. There were signs that the turmoil that has engulfed Wall Street was already spreading to consumers and small businesses in the second quarter.

Personal spending that fuels two-thirds of national economic activity grew at a revised 1.2% rate instead of 1.7% previously estimated, partly because spending for costly durables like cars contracted more sharply. Analysts expect consumers to keep retrenching in coming months as job losses mount and doubts about the economy's ability to stay out of recession grow.

Businesses also appeared to be growing more wary about economic prospects in the second quarter. Spending on equipment and software, typically made when companies are planning production increases, shrank at a 5% rate rather than the 3.2% rate previously estimated.

It was the second straight quarter in which equipment and software spending contracted and was the steepest for any quarter since the beginning of 2002.

Companies cut their inventories at an annual rate of $50.6 billion in the second quarter. That was higher than the $49.4-billion rate previously estimated and was nearly five times the $10.2-billion rate at which inventories were trimmed in the first three months - a potential sign that businesses are bracing for tougher times ahead. (Reuters)