US growth anaemic, debt fight poses recession risk

The US economy stumbled badly in the first half of 2011 and came dangerously close to contracting in the January-March period, raising the risk of a recession if a stand-off over the nation's debt does not end quickly. The Commerce Department data on Friday also showed the current lull in the economy began earlier than had been thought, with the growth losing steam late last year.
--- Second-quarter growth rises at 1.3pc rate
--- First-quarter GDP cut to 0.4pc rate from 1.9pc
--- Consumer spending barely rises, weakest in two years
That raised questions on the long held view by both Federal Reserve officials and independent economists that the slowdown in growth this year was mostly due to transitory factors. The economy grew at a 1.3 percent annual pace in the second quarter after expanding just 0.4 percent in the first three months of the year. First-quarter growth was revised from the previously reported 1.9 percent increase.
While the recovery stepped-up in the second quarter, economists had expected a stronger 1.9 percent reading. Fourth-quarter growth was revised to a 2.3 percent rate from 3.1 percent. The US Treasury has said it will run out of borrowing authority on Tuesday and the government could quickly run out of enough cash to pay all its bills.
"This should wake up those in Washington who still have their thinking caps on," said Joel Naroff of Naroff Economic Advisors in Holland, Pennsylvania. "There is no margin for error and a default that lasted any length of time could push us back into recession."
US stocks fell on the data, while prices for government debt rose. The dollar fell against a basket of currencies. Consumer spending, which accounts for about 70 percent of US economic activity, decelerated sharply to a 0.1 percent rate - the weakest since the recession ended two years ago.
And the outlook for consumer spending is not encouraging. The Thomson Reuters/University of Michigan's index of consumer sentiment fell to 63.7 in July from 71.5 in June, a separate report showed. Motor vehicle production subtracted 0.12 percentage point from gross domestic product growth in the second quarter, after adding 1.08 percentage points to first-quarter GDP growth.
The composition of growth in the April-June quarter was weak and could prompt economists to dial down their expectations for a solid rebound in the third quarter. A smaller trade deficit, as imports slowed, was one of the main contributors to the rise in second-quarter growth, with businesses spending and inventory investment also adding to output.
Government spending declined again as state and local authorities continued to pare their budgets, even though defence expenditures rebounded at 7.3 percent rate after contracting at a 12.6 percent rate in the first three months of the year.
Home building rose at a 3.8 percent pace, while investment in non-residential structures increased at an 8.1 percent rate. The easing of the auto parts disruptions and a drop in gasoline prices could be a tail wind to third-quarter growth, but economists are concerned that data for June has been weak.