GDP Revised Sharply Downward in Q2; Consumer Sentiment a Bit Higher

Economy is limping along at a 1.6% pace, but corporate profits remain strong

A revised estimate of second-quarter GDP on Friday, August 27, showed that the economy grew at 1.6% annual pace, down sharply from the government's first estimate of 2.4%. Added to this week's glum reports on home sales, and the economy appeared to be stalling out.

The revision was slightly better than the 1.4% figure that economists polled by Bloomberg had been expecting. The Commerce Department reported that a surge in imports and slackening of companies restocking goods fueled the downward revision.

Ethan Harris, an economist at Bank of America-Merrill Lynch, speaking to The Associated Press, said, "We seem to be in the early stages of what might be called a 'growth recession.' " Harris, and other economists, believes the economy will limp along in the second half, with the unemployment rate likely moving a bit above 9.5%.

Federal Reserve Chairman Ben Bernanke said Friday at the annual Federal Reserve conference in Jackson Hole, Wyoming, that the Fed stood ready to support the economy by buying more longer-term securities. Bernanke said the economy should continue to grow throughout 2011, though at a "relatively modest pace."

Meanwhile, the closely watched University of Michigan/Thomson Reuters survey showed that consumer sentiment edged up to 68.9 in August from 67.8 in July, but remained well below levels seen during the previous six months.

A continuing bright spot is corporate profits, which are near their pre-recession peak, according to a report released Friday by the Bureau for Economic Analysis. Profits from current production increased 4.6% in the second quarter. The growth was not as strong as the first quarter's, but it was still 39% higher than its level a year earlier. And six straight quarters of growth mean that corporate profits today are almost as high as their peak before the downturn began, The New York Times reported.

The cautious companies sitting on this pile of cash is one reason job growth is tepid, and leads to the question: When are they going to start spending that money?

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