Gas pumps are seen at a Exxon gas station in Boston.CHITOSE SUZUKI/The Associated Press
The Great Recession was deeper than previously thought, the recovery is too slow to lower a destructively high unemployment rate - and, remarkably, U.S. politicians are only making the situation worse.
As Democrats and Republicans allowed their protracted squabble over debt to spill into the weekend, the Commerce Department released new economic figures Friday that only darkened the cloud hanging over the world's largest economy.
Many economists stuck to forecasts that the U.S. economy will strengthen over the second half of the year, saying that the effects of a surge in gasoline prices and the natural disaster in Japan will fade.
But there's no denying that a recovery that was already thought to be weak is in fact too fragile to absorb many more transitory shocks.
U.S. gross domestic product advanced at an annual rate of 1.3 per cent in the second quarter, weaker than the 1.8-per-cent reading that most analysts on Wall Street were expecting, and less than half the pace that economists say is necessary to significantly reduce the country's 9.2-per-cent unemployment rate.
Revisions to earlier data showed the economy advanced at a stalling speed of 0.4 per cent in the first quarter. The new calculations also showed that GDP contracted 5.1 per cent during the recession, a full percentage point greater than the previous estimate.
The figures added urgency to the debate over the debt ceiling, which the Obama administration says must be raised by Tuesday, when the Treasury Department says it will start to run short of cash to pay all the government's bills. That could force the U.S. to default for the first time in its history, and prompt a downgrade of the country's gilded credit rating. A lower rating could result in higher borrowing costs at a time when credit demand already is weak.
"The power to solve this is in our hands," President Barack Obama said at the White House. "On a day when we've been reminded how fragile the economy already is, this is one burden we can lift ourselves."
Many observers of U.S. politics continued to say Friday that Congress and the White House would come to some kind of agreement by the Aug. 2 deadline.
But the inability of the current crop of politicians to avoid brinkmanship over something as fundamental as paying the U.S.'s financial obligations is raising doubts about whether Washington is up to the task of dealing with its longer-term debt issues. The U.S. dollar slumped this week, and stock markets tumbled, despite a streak of relatively strong corporate earnings.
"It's very frightening," Ray Zuckerman, chief executive officer of Serverlift, a small manufacturing company in Phoenix that makes equipment for handling computers in data centres, said of Washington's debt impasse. "It's affecting our business right now. People are holding off making decisions."
The angst being caused by the debt-ceiling negotiations isn't confined to executives of smaller companies such as Serverlift.
Michael Duke, CEO of Wal-Mart Stores Inc., told a Senate committee this week that consumer confidence is too weak right now to handle the psychological impact of the U.S. losing its triple-A credit rating and the financial blow of higher interest rates that would follow. The heads of Wall Street's biggest banks, including Goldman Sachs Group Inc.'s Lloyd Blankfein and JPMorgan Chase & Co.'s Jamie Dimon, sent lawmakers and the president a letter Thursday urging them to settle.
The U.S. economy is suffering from a lack of demand. Personal consumption adjusted for inflation was stagnant in the second quarter, growing at an annual rate of just 0.1 per cent. That's putting a strain on makers of consumer goods, many of which are facing higher costs as the result of a surge in commodity prices earlier this year.
"It's the consumer and competitive picture that has become more difficult than we expected," Indra Nooyi, CEO of PepsiCo, the world's largest maker of snack food, said on a July 21 conference call.
At another time, the government might have sought to make up for the lack of spending in the economy. But in the U.S. right now, the dynamic is the opposite.
The debate between Mr. Obama, House Speaker John Boehner and Senate Majority Leader Harry Reid is centred on whether the debt ceiling will be raised by enough to avoid another standoff before the 2012 presidential election. The Democrats have given up trying to achieve an overhaul of the tax code or some short-term stimulus measures.
Instead, there's a political consensus around spending cuts of about $2-trillion (U.S.) over the next decade. These reductions would begin immediately, reducing GDP growth by more than 0.1 percentage point in 2012, according to research firm Macroeconomic Advisers. That's only going to exacerbate the drag on growth from government spending, which now has contracted three quarters in a row.
"They are not working on the country's problems," said Robert Johnson, executive director of the Institute for New Economic Thinking and former chief economist at the Senate Banking Committee. "We need more demand in this society."