Economy edges closer to stalling, government says

WASHINGTON - The economy turns out to be weaker than we thought, and the outlook for the rest of the year is now looking dimmer.

New figures issued Friday show the economy struggled this spring, growing at a meager 1.6 percent annual pace. The initial estimate was 2.4 percent, and even that was anemic. Analysts say the summer should be disappointing, too.

Shortly after the government's revision, Federal Reserve chief Ben Bernanke said the Fed was ready to take additional steps to prevent a second recession, if the economy deteriorates further. But he stopped short of promising any action.

The Fed "will do all that it can to ensure continuation of the economic recovery," he said.

Several economists said they expected the economy to keep growing slowly for the rest of the year. That would almost certainly not be enough to bring down the jobless rate, already at 9.5 percent, and unemployment could actually increase.

The performance is "very disappointing," said Ethan Harris, an economist at Bank of America-Merrill Lynch. "Usually you get a bigger bounceback."

In the first quarter of the year, the economy grew much faster, at a 3.7 percent pace. Since then, though, the housing market has slumped after the expiration of a homebuyer tax credit, and business spending and manufacturing activity are both cooling off.

Bernanke, speaking to a Fed conference in Jackson Hole, Wyo., acknowledged the economy has slowed more than policymakers had anticipated and said it is "vulnerable to unexpected developments."

He did say he expects growth will pick up next year. The central bank chairman also sought to reassure the financial markets that he has the tools needed to bolster the economy and will use them if business activity slows further.

Bernanke outlined several options, including having the Fed buy more securities, most likely government debt or mortgage investments, as a way to drive down interest rates on all sorts of debt and spur more spending that might get the economy going.

Bernanke made clear "he is willing to act to ensure that the recovery remains on the right path," said Zach Pandl, an economist at Nomura Securities.

That reassured the financial markets, which rose sharply after the Fed chairman's speech. The Dow Jones industrial average finished 164 points higher and back over 10,000, and broader markers registered solid gains.

Wall Street looked past a disappointing statement from computer chip maker Intel, which said it was cutting its sales forecast for the quarter after sensing weaker demand from customers in the U.S. and Europe. A little more than a month ago, Intel reported its biggest quarterly profit in a decade.

How much the government could help at this point is an open question. The Fed has already lowered its key short-term interest rate to nearly zero, but that has yet to rejuvenate the economy. The benefits of federal stimulus programs are fading, and Congress has declined to pass any major new aid.

Bernanke said the prospect of high unemployment for a long period is a central concern for the Fed. He also made clear that he is determined to prevent the United States from slipping into a deflationary spiral - a prolonged drop in wages and prices.

The Fed chief said the foundation is being laid for stronger growth in 2011: Households are saving more and healthier banks are more willing to lend. That should boost consumer spending, which makes up 70 percent of U.S. economic activity.

Corporate profits and personal incomes also rose in the second quarter, noted Rebecca Blank, undersecretary for economic affairs at the Commerce Department.

"There is some good news here," she said. "Those are the things that will fuel a longer-term recovery."

Still, the report for April to June showed that economic growth was reduced by a surge of imports in June and a smaller buildup in business inventories than previously estimated.

Without the trade deficit, the economy would have grown at a healthy 5 percent pace. Instead, the gap essentially subtracted 3.4 percentage points, the biggest hit from a trade imbalance since 1947.

Business investment in new machinery, computers and software rose nearly 25 percent, driving much of the growth last quarter. But much of that spending was on goods from other countries - a 32 percent increase in imports, the most since 1984.

Bernanke and many private economists seem to think that was mostly an aberration. As businesses pare back their spending on inventories and reduce investment in new equipment, imports should decline and come more into alignment with exports, they say.

Americans personally spent a bit more in the second quarter than previously calculated. Their spending rose at a 2 percent annual rate, above the 1.6 percent estimated last month.

The government's report measures the gross domestic product, which covers goods and services from autos to haircuts. Friday's report is the second of three estimates the government makes each quarter.

---

Associated Press Writers Jeannine Aversa and Alan Zibel contributed to this report.