The economy inched ahead at a 1.3 percent annual growth rate last spring, held back by soaring gasoline prices and disruptions in manufacturing caused by the March earthquake/tsunami in Japan.
The tepid growth rate reported by the Commerce Department Friday morning follows an even more paltry performance of 0.4 percent growth in the first quarter — making the first half of the year the worst since the Great Recession.
Growth averaged a healthier 3 percent in 2010, but according to revisions published by the department, the downturn following the 2008 financial crisis was even deeper than previously thought, with the economy shrinking by a total of 5.1 percent rather than 4.1 percent.
Gas prices that touched record highs near $4 a gallon in May took a dramatic toll on consumer spending. Real spending, adjusted for gas-driven price inflation of over 3 percent, barely grew with a 0.1 percent gain in the spring quarter. That follows a more solid 2.1 percent gain in consumer spending in the first quarter.
The report comes as Congress and the White House remain deadlocked on a deal to raise the federal borrowing limit to avoid what the administration says would be a default on August 2.
“There is absolutely no good news in this report and one would really hope that it will focus the minds of those in Washington on resolving the debt-ceiling issue as soon as possible,” said David Semmens, economist at Standard Charter.
With lackluster growth prevailing in the first half of the year, analysts said the economy’s performance likely only got worse during the summer quarter because the partisan standoff in Washington is further sapping confidence and spending by both consumers and businesses.
“What is worrisome is that each month in the quarter was weaker than the month before,” said Chris Lowe, chief economist at FTN Financial. “We are looking at another slow quarter in the third quarter — but still positive, so no recession. At this point, growth is so close to zero that confidence is more important than it normally is and the distraction of the debt-ceiling fight could make a big difference. A government shutdown would have a big impact as well.”
A 2.2 percent acceleration of federal spending contributed to growth in the spring quarter, which runs from April to June, but a pullback in government spending subtracted from growth in the winter, the department said.
Any shutdown of federal payments next month caused by Congress‘ failure to raise the debt ceiling would cause a sharp drop in federal spending and have a dramatic impact on the economy, analysts said. Under various budget plans circulating in Washington, further cuts in federal spending are likely to start detracting more from growth in any case, as Congress imposes stiff restraints on the government.
Cuts in state and local spending have been a significant drag on the economy since the recession and strongly pulled down growth during the spring, falling at a 3.4 percent rate for a second quarter in a row. The biggest drops in state and local spending since the recession reflected the end of federal support from the president’s $800 billion stimulus plan.
A drop in motor vehicle production also held back growth during the spring, as the plants of Japanese automakers in the U.S. were unable to produce cars because of parts shortages caused by the earthquake in Japan. The decline in auto production subtracted 0.12 percentage points from growth in the spring after adding more than 1 percentage point in the winter.