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Continued: Weak growth and Fed statement point to a still-lackluster economy

  • Article by: CHRISTOPHER S. RUGABER , AP Economics Writer
  • Last update: July 31, 2013 - 4:45 PM

Even as consumer and business demand have remained steady, government cutbacks have weighed heavily on the economy. Over the past four quarters, the economy has grown at just a 1.4 percent annual rate. But if you exclude federal, state and local governments, the private sector has expanded at a much stronger 2.3 percent rate.

The "ongoing fiscal drag is masking private sector health," LaVorgna said.

There are signs the drag is fading. The federal government cut spending only 1.5 percent in the second quarter after slashing it 8.4 percent in the first. And state and local governments spent more last quarter for the first time in a year.

Overall, economists expect growth will rise to an annual rate of around 2.5 percent in the third and fourth quarters.

On Wednesday, the government also released comprehensive revisions that updated GDP over the past several decades. Those figures showed that the Great Recession wasn't quite as deep as initially estimated and that the recovery has been stronger than earlier thought.

The revisions estimated that the economy grew 2.8 percent in 2012, up from an earlier estimate of 2.2 percent.

GDP is the broadest measure of the nation's output of goods and services. It includes everything from manicures to industrial machinery. The government's comprehensive revisions included changes in how GDP is defined.

Research and development spending is now counted as an investment — and thus a contributor to GDP — rather than a cost. So is spending on the development of entertainment products like movies, music, books and TV shows. Those and other changes expanded the economy by about $560 billion, or 3.5 percent, as of the end of 2012 — to $16.4 billion.

Pension benefit promises are now counted as income. That's a shift from the previous approach, which counted only actual cash payments by companies and government agencies into pension plans. That change boosted the savings rate by 1.5 percentage points in 2011 and 2012 to about 5.6 percent. In the second quarter, Americans saved 4.5 percent of their after-tax income, up from 4 percent in the first quarter.

The biggest source of optimism for the economy has been the acceleration in hiring. Employers added an average of 202,000 jobs a month from January through June, up from 180,000 in the previous six months.

A separate report Wednesday pointed to solid job gains in July. Payroll provider ADP estimated that businesses added 200,000 jobs in July, the most in its survey since December.

Unemployment is still limiting consumer spending. And budget fights in Washington could lead to a government shutdown this fall, potentially disrupting the economy.

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