Economy edges closer to stalling

August 28, 2010 at 12:00a.m.

Associated Press

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 almost certainly would not be enough to bring down the jobless rate, already at 9.5 percent, and unemployment could actually increase.

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 home-buyer tax credit, and business spending and manufacturing activity are cooling off.

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.

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 already has lowered its key short-term interest rate to nearly zero, but that yet has to rejuvenate the economy.

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.

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.