Housing and jobs drag raises the odds US has hit recession

By Bob Willis  |   2008-8-1  |     NEWSPAPER EDITION

THE United States economy expanded less than forecast in the second quarter as the drag from housing and rising unemployment blunted the impact of federal tax rebates, a Commerce Department report showed yesterday.

The economy grew at a 1.9-percent annualized rate from April through June, after a 0.9-percent pace in the first quarter that was smaller than previously estimated, the Commerce Department said yesterday in Washington. The report also contained annual revisions that lowered the growth rate back to 2005 and showed gross domestic product contracted in the last three months of 2007.

Stock-index futures dropped and Treasuries rallied after the figures raised the odds that the US has entered a recession. Growth may weaken in the second half as unemployment increases, with government figures today forecast to show a seventh straight month of payroll declines.

"As the stimulus spending wears off, with the backdrop of a weak labor market, consumer spending will take a leg down," John Ryding, chief economist at RDQ Economics LLC in New York, told Bloomberg News before the report. "That's when you might get a conventional GDP recession."

Yields on benchmark 10-year notes fell to 3.97 percent at 8:41am yesterday in New York, from 4.05 percent late Wednesday. Futures on the Standard & Poor's 500 Stock Index declined 0.7 percent to 1,276.20.

The smallest trade deficit in seven years prevented the economy from shrinking again last quarter. The trade gap narrowed to a US$395.2-billion annual pace, adding 2.4 percentage points to growth, the most since 1980. Excluding trade, the economy would have contracted at a 0.5-percent pace, the second decline in the last three quarters.