US economic growth slows but Wall Street remains unfazed

Published on Friday 30 July 2010 15:53

WALL Street yesterday shrugged off news that the US economy had grown at a slower pace than expected during the second quarter.

The commerce department said gross domestic product - the broadest measure of the economy - expanded at an annual rate of 2.4 per cent from April to June. The result is less than the 2.5 per cent pencilled in by economists and well down on the 3.7 per cent in Q1.

Yesterday's Q2 reading is an initial estimate, and could be revised up or down over the coming months. The US economy has now grown for four consecutive quarters.

Despite the confirmation of a slowdown in the world's biggest economy, leading Wall Street stocks clawed back early sharp falls. Losses moderated after the University of Michigan/Reuters consumer sentiment index for July rose slightly more than expected.

The Dow Jones Industrial Average has gained about 7 per cent during July, thanks to strong corporate earnings and profit forecasts that conflict with economic reports that point to a slowdown.

In the past few days, however, investors have been more focused on the economic data. Disappointing numbers on housing and unemployment and cautious words from the Federal Reserve have sent stocks lower.

CEBR economist Scott Corfe noted: "The slowdown in the (GDP] growth rate was primarily due to an acceleration in imports and a decline in inventory investment.

"Although exports of goods and services increased at an annualised rate 10.3 per cent in Q2, this was greatly outstripped by a 28.8 per cent rise in imports of goods and services."

He added: "Worries about the strength of the US recovery prompted Fed chairman Ben Bernanke to announce that the US 'should maintain (its] stimulus in the short term'. This would suggest that, as with the UK economy, loose monetary policy and low interest rates could remain in place for some time."

The large increase in imports and a fall in sales of goods such as cars partly explain the slowdown in GDP growth, while personal consumption grew at a slower rate than in the first quarter.

These factors more than offset higher spending on property construction, as people looked to take advantage of tax credits for home-owners and buyers that expired during the period.

The final reading of the University of Michigan consumer sentiment index for July rose to 67.8 compared with a preliminary reading of 66.5. Economists expected it to increase to just 67.

White House economic adviser Christina Romer said the first-half US GDP growth rate of more than 3 per cent showed the steady recovery from recession was continuing.

However, she added that faster growth is needed to spur substantial improvement in employment and "much work" is still to be done before the economy is fully recovered.