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US GDP Data Revised Down in Second Quarter

Economic growth for the second quarter of 2012 was revised down sharply to 1.3%, a reminder that economic activity really stalled out in the spring.

Thursday’s report underscored that the recovery has proved insufficient to pull down the unemployment rate, which has been stuck between 8.1 percent and 8.3 percent all year.

The renewed weakness this month spurred the Federal Reserve to act to support the economy, putting in place a third major round of bond purchases designed to aid the nascent housing recovery and to encourage employers to add jobs.

Much of the downward revision to the second-quarter figures was because of the effects of the nation’s worst drought in 50 years. Farm inventories dropped in the second quarter, after falling in the first as well.

More broadly, cuts to state and local government spending have held down growth, and private firms have hesitated to invest during the poor business climate, despite the attraction of low interest rates on loans.

The drought really only hit at the end of the quarter, so that doesn’t seem totally right to me. Rather, the usual factors that have blocked escape velocity in the economy remain out there: anti-stimulus in the states, low aggregate demand from poor sales, headwinds from Europe and high gas prices, and an inability for Congress to approve fiscal accommodation to fill this gap. And this is the result: a 1.3% GDP growth in the quarter, with employment gains at less than 100,000 jobs a month, not enough to budge the unemployment rate.

If anything, the data show that the Federal Reserve should have acted much earlier to provide monetary accommodation for promoting economic growth. However, the action they took, to purchase mortgage-backed securities to boost the housing market, has so far only provided additional profits for banks. They have not passed the savings from lower securitization costs on to their consumers. Mortgage rates have barely dropped, while the yields on bonds have dropped significantly. The spread between the rates at which banks charge borrowers for mortgages and the rates they sell the loans for securities is at a record high.

So the bang for the buck out of QE3 looks to be minimal. Some baseline housing numbers are improving, though the reasons for that are not at all positive. And indeed, there could be headwinds even on that; pending home sales dropped 2.6% in August.

The weekly unemployment numbers improved markedly last week, and consumer confidence has recently shot up, though this may be a sugar high related to the election.

We’ll see numbers on the third quarter soon. But the data we have through June show an economy stuck in neutral.

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David Dayen

David Dayen