US economy grinds to near-stall

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The US economy stagnated in the first half of 2011, official data showed on Friday, raising new recession alarms as political gridlock over deficits leads the country to the brink of a debt default.

The Commerce Department reported that gross domestic product grew only 1.3 per cent in the second quarter, after a dead-pace 0.4 per cent in the first, the weakest growth since the economy officially exited recession two years ago.

Both numbers sharply undercut earlier estimates and forecasts -- originally first-quarter growth had been put at 1.9 per cent -- and raised doubts about widespread forecasts of a 3.0 per cent-plus pace for the rest of the year.

"This is a shockingly weak GDP report that shows the economy growing at less than a 1.0 per cent pace in the first half of the year," said John Ryding and Conrad DeQuadros at RDQ Economics.

"The weak numbers raise questions about the sustainability of the recovery in the second half of 2011," Moody's Analytics said.

Consumer spending, which accounts for the majority of US output, stalled in the second quarter, amid high unemployment and inflation-eroded incomes.

The surprisingly weak GDP numbers came as political deadlock grips Washington over raising the country's debt ceiling with potential default just four days away.

The Treasury says it could run out of money to pay some of its obligations by Tuesday.

With no sign of an agreement in Congress, economists and markets are increasingly worried that missing the August 2 deadline will cause the United States to lose its top triple-A credit rating, triggering a further hit to the economy.

The poor GDP report added to gloom on Wall Street. The Dow index plunged on in opening trade and closed almost 97 points lower, down 0.8 per cent for the day.

A top adviser to President Barack Obama said the weak economic data underscored the need for politicians to break the budget impasse.

"We are at a fragile moment in the world economy and cannot afford to do anything to undermine our recovery at a moment such as this," Austan Goolsbee, head of the Council of Economic Advisers, said in a White House blog.

"This was an ugly report that should wake up those in Washington who still have their thinking caps on. The last thing this economy needs is more uncertainty and a debt default," said Joel Naroff of Naroff Economic Advisors.

"There is no margin for error and a default that lasted any length of time could push us back into recession," he warned.

The second-quarter data reflected a slew of headwinds, including high commodity prices, Japanese supply-chain disruptions from the March 11 earthquake, financial market jitters over Europe's debt crisis and a US government gridlocked over deficit-reduction and debt.

Consumer spending, which normally drives most of the US economy, edged up just 0.1 per cent, the first time it was virtually unchanged since the economy officially exited recession in June 2009. It had climbed 2.1 per cent in the prior quarter.

The negative factors offset growth that came mainly from exports, nonresidential fixed investment, private inventory investment and federal government spending, the department said.

The economy remained well below the strength needed to create jobs, leaving the troubled labor market with unemployment at 9.2 per cent in June.

The report led to downward revisions of growth estimates for the rest of the year. Deutsche Bank cut its third-quarter GDP estimate by a full per centage point to 2.5 per cent, and cut its fourth-quarter forecast from 4.3 per cent to 3.0 per cent.

Friday's annual revision of previous years' data also gave a grim assessment of the economy's performance during the financial crisis, which peaked in 2008-2009, triggering the worst recession since the 1930s Great Depression.

It said during 2007-2010, the economy contracted an average 0.3 per cent annually, instead of growing 0.1 per cent each year as previously estimated.

In the worst quarter of the period, October-December 2008, the economy shrank at a rate of 8.9 per cent.