The U.S. 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 U.S. borders, expanded at a 2.8 percent rate in the April-June quarter rather than the 3.3 percent rate it estimated a month ago.
"It pretty much corroborates the fact that the weakness in the U.S. economy is really starting to take hold," said Boris Schlossberg, director of currency research at GFT Forex in New York. "All the latest data that we have seen on the employment front and the production front … suggest that GDP growth is going to slow materially into the second half of the year."
The new evidence of fading economic activity came amid confusion in Washington about whether a plan to bail out U.S. 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 and, on Friday, he sought to calm markets in a brief appearance at the White House.
"We are going to get a package passed," Bush said. "We will rise to the occasion. Republicans and Democrats will come together and pass a substantial rescue plan."
At mid-morning, a Reuters/University of Michigan survey showed that consumer optimism began to nosedive during September as a drumbeat of bad news about the economy and the banking system grew in intensity.
The final reading on its consumer sentiment index slipped to 70.3 from 73.1 at the start of September — a month in which the government seized control of mortgage finance companies Fannie Mae and Freddie Mac and Wall Street investment bank Lehman Brothers Holdings Inc. filed for bankruptcy.
The GDP data is backward-looking and markets paid scant heed to it amid the drama gripping financial markets in the U.S. and globally. Stock prices fell sharply as U.S. markets opened, then recovered some losses as it appeared trading was headed for a day of whipsawing over whether a bailout plan will be reached.
The dollar's value rose against the euro as investors weighed whether the European Central Bank may cut interest rates sooner rather than later as their economies slow.
While GDP growth was ahead of the first quarter's 0.9 percent rate, economists surveyed by Reuters had forecast the second-quarter pace would stay at 3.3 percent 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, which fuels two-thirds of national economic activity grew, at a revised 1.2 percent rate instead of 1.7 percent 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.
"I'm afraid that the real economy is unraveling very quickly," said Nigel Gault, chief U.S. economist for Global Insight in Lexington, Massachusetts. "Growth may be between zero and 1 percent in the current (third) quarter. I think we'll be negative in the fourth quarter."
Central banks around the world pumped more cash into the financial system overnight, trying to keep credit markets from seizing up as a financial crisis went from bad to worse.
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 percent rate rather than the 3.2 percent 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 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.
Corporate profits after taxes shrank by 5.4 percent in the second quarter, the biggest decline since the third quarter of 2005 and another indicator that companies are likely to be reluctant to hire and invest in coming months.
Federal Reserve Chairman Ben Bernanke, who along with Treasury Secretary Henry Paulson is trying to rally support for a taxpayer-financed bank bailout that faces opposition from Republican lawmakers, warned this week that the economy is on the brink of a rapid worsening unless action is taken to stabilize financial markets.
"Economic activity appears to have decelerated broadly," Bernanke told Congress on Wednesday. "The intensification of financial stress in recent weeks, which will make lenders still more cautious about extending credit to households and business, could prove a significant further drag on growth."
