Economy slows to 1.6 percent as trade gap widens

Economy slows to 1.6 percent as trade gap widens

In this photo taken July 14, 2010, construction workers break ground on an industrial park complex in Springfield, Ill. The economy grew at a much slower pace this spring than previously estimated, mostly due to the largest surge in imports in 26 years and a slower buildup in inventories.

WASHINGTON (AP) -- The economy grew at a much slower pace this spring than previously estimated, mostly due to the largest surge in imports in 26 years and a slower buildup in inventories.

The nation's gross domestic product - the broadest measure of the economy's output - grew at a 1.6 percent annual rate in the April-to-June period, the Commerce Department said Friday. That's down from an initial estimate of 2.4 percent last month and much slower than the first quarter's 3.7 percent pace. Many economists had expected a sharper drop.

The widening trade deficit subtracted nearly 3.4 percentage points from second quarter growth, the largest hit from a trade imbalance since 1947, the government said.

The report confirms the economy has lost significant momentum in recent months. Most analysts expect the nation's GDP will continue to grow at a similarly weak pace in the current July-to-September quarter and for the rest of this year.

The economy has grown for four straight quarters, but that growth has averaged only 2.9 percent, a weak pace after such a steep recession. The economy needs to expand at about 3 percent just to keep the unemployment rate, currently 9.5 percent, from rising.

Business investment in new machinery, computers and software drove much of the growth last quarter, increasing nearly 25 percent.

But much of that spending involved the purchase of imported goods. Imports surged 32.4 percent, the most since 1984. That overwhelmed a 9.1 percent increase in exports.

Consumers spent a bit more in the second quarter than previously estimated. Their spending rose at a 2 percent annual rate, slightly higher than the first quarter's 1.9 percent.

Economists expect many other supports for economic growth to fade. Federal government spending and the housing sector bolstered the economy last quarter, but housing has slumped again and will likely drag growth down in the third quarter. The impact of the federal government's $862 billion stimulus package is also projected to taper off this year.

There are few other signs of strength. Even business investment is expected to drop, as a report earlier this week showed that business orders for capital goods fell in July.

The government's GDP report measures the economy's output of goods and services and covers everything from autos to haircuts. Friday's report is the second of three estimates the government makes each quarter.