US GDP growth revised down to 1.6 percent as economy cools

US GDP grew at a 1.6 percent pace in the second quarter, less than the original 2.4 percent estimate. Surging imports and the end of homebuyer tax credits contributed to the change.

The US economy rose at a 1.6 percent pace in 2010's second quarter, a number that's disappointingly tepid but still keeps hope alive that the US will avoid a dip back into recession this year.

The number represents a sharp decline in the speed of economic recovery compared to the first quarter, when the gross domestic product (GDP) grew at a 3.7 percent pace. The Friday morning report from the Commerce Department also represented a downward revision to its initial estimate for the second quarter (2.4 percent) from a month ago.

US stock indexes opened marginally higher on the news, since the downward revision was not quite as bad as expected.

A bright spot is that consumer spending, which represents the core of the economy, has risen at least modestly for four straight quarters. The pace remains slower than normal in an economic recovery, however.

"Underlying demand in the economy is there, just at a slower pace than many had expected," John Silvia, chief economist at Wells Fargo Securities in Charlotte, N.C., said in a Friday morning note. "This revision [to GDP] suggests slower gains in consumer growth for the second half of this year."

Worries that the United States may fall back into recession have weighed on financial markets in recent weeks.

Americans' disposable personal income has risen in both quarters so far this year, helping to sustain spending growth even as people have boosted their savings, according to the GDP numbers. But the growth pace is tentative. Personal consumption grew at just a 2 percent annual pace in the second quarter.

Some factors that affected GDP in the second quarter have been shifting as the calendar has ticked into the year's second half. The end of special tax credits for home buyers has caused a stall in housing market activity. State governments are moving to cut spending after making a small positive contribution to GDP in the second quarter. Those factors could weigh on domestic consumption.

But one big negative in the second quarter was a surge in imports. The purchase of goods from overseas is counted as a subtraction from GDP (while exports add to domestic output). Without the import boom, GDP would have been 4.45 percentage points higher in the quarter. "Imports can be lumpy, and the leap recorded in Q2 undoubtedly reflected efforts to replenish inventories that began earlier," writes Joshua Shapiro, chief US economist at MFR Inc. in New York.

Many forecasters say that economic reports so far in the third quarter suggest the economy is still growing, but so slowly that job growth has stalled.

A key problem is confidence: Many consumers are reluctant to spend, and employers are in a kind of hiring freeze as they wait for a revival in demand. Employers say they're worried about whether Washington will provide a business-friendly policy environment.

Credit conditions may also be holding the recovery back. Bank credit expanded in the Federal Reserve's most recent monthly report, so this problem may be starting to ease. Even in an economy in which many households are struggling with high debt loads, economists see the flow of new credit as an important foundation for growth.

"The task of economic recovery and repair remains far from complete," Federal Reserve Chairman Ben Bernanke said in a major policy speech Friday in Jackson Hole, Wyo. "Financial conditions are generally much improved," he added. "But bank credit remains tight."