Economic Growth Rate Downgraded to Anemic 1.6 Percent in Second Quarter

WASHINGTON -- The Commerce Department is revising downward the economic growth from April to June to 1.6 percent -- a decline from the original 2.4 percent forecast and much slower than the 3.7 percent of the first quarter 2010.

The barely-there number isn't enough keep pace with population growth, which needs about 3 percent annualized growth just to break even each year and prevent unemployment, currently 9.5 percent, from rising.

The trade imbalance -- the largest since 1947 -- took away nearly 3.4 percent from second quarter growth, the Commerce Department said.

The current quarter isn't expected to show much improvement, with many economists forecasting growth of only 1.7 percent.

Economists say the number could be a taste of weakness to come -- and fears of a double-dip recession are growing.

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"The odds of the third quarter being negative look reasonably high," said Kevin Hassett, senior fellow and director of economic policy at the conservative American Enterprise Institute. "Fifty-50 chance."

The economy has grown for four straight quarters, but that growth has averaged only 2.9 percent, a weak pace after such a steep recession.

Hassett put the blame squarely in President Obama's lap.

"The policies have been so terrible that they sort of feel to me like the choices of an excessively arrogant, uninformed person, and his economic policy team doesn't match that description, at least part of it," he said.

But Josh Bivens, an economist for the liberal-leaning Economic Policy Institute, said the massive $862 billion stimulus helped prevent the economy from declining in the last quarter.

"Without the stream of spending provided by the Recovery Act the economy would have contracted outright. This is most troubling, as Recovery Act money is almost spent and will provide no boost to growth going forward. The case for more action from policymakers to support the recovery and return the job-market to health is now overwhelming," he said in a statement.

Business investment in new machinery, computers and software, increasing at 25 percent in the second quarter from the first, is credited with much of the growth last quarter, but the benefit is tempered by the fact that much of that spending paid for imported products.

Imports surged 32.4 percent, the most since 1984. That overwhelmed a 9.1 percent increase in exports.

Though business investment was a big assist to the growth rate, that is driving part of the concern about the third quarter. A report earlier this week showed that business orders for capital goods fell in July, suggesting that business purchases will decrease this quarter.

Consumers spent a bit more in the second quarter than previously estimated. Their spending rose at a 2 percent annual rate, slightly higher than the first quarter's 1.9 percent.

Economists expect many other supports for economic growth to fade. Federal government spending and the housing sector bolstered the economy last quarter, but housing has slumped again and will likely drag growth down in the third quarter. The stimulus money will also taper off soon.

Hassett said that "President Obama has to be more reasonable" about economic policy, but predicted that unless he changes course on several matters -- like raising taxes on capital gains and dividend taxes or raising taxes on foreign-earned profits by U.S.-based multinational companies -- a recession is not only likely but could be expected to last "right through the next presidential election."

"It's impossible to overcome the massive negatives" before then, he said.

Some political analysts have speculated that Obama could offer an "October surprise" ahead of November's congressional election by extending Bush-era tax cuts to all income rates, including the wealthiest Americans who are credited with creating jobs.

Joe Trippi, former campaign manager for 2004 Democratic presidential candidate Howard Dean, said Obama will base a decision based on what he thinks is right, not the impending midterm election.

"It's crazy to think they'll make this decision based on the election. It won't impact the election," Trippi, a Fox News contributor. The economy is already "baked in the cake."

The government's GDP report measures the economy's output of goods and services and covers everything from autos to haircuts. Friday's report is the second of three estimates the government makes each quarter.

The Associated Press contributed to this report.