G.D.P. Grows at Tepid 1.9% Pace Despite Stimulus

The American economy expanded at a weaker-than-expected 1.9 percent annual rate between April and June, the Commerce Department announced Thursday, while numbers for the last three months of 2007 were revised downward to show a contraction — the first dip since the recession of 2001.

Economists construed the disappointing quarter, combined with a surprisingly large surge of new claims for unemployment insurance, as clear indication that the economy remains snagged in the weeds of a widening downturn. Many said the data added to the likelihood that the economy fell into a recession sometime late last year.

“We already knew the economy was weak, and now you have both a negative growth number coupled with job losses,” said Dean Baker, a director of the liberal Center for Economic and Policy Research. “There’s a lot of real bad times to come.”

President Bush zeroed in on the positive growth rate in the second quarter as a sign of resilience, dismissing the characterizations of professional economists.

“We got some positive news today,” the president said in West Virginia, addressing a coal industry trade association. “It’s not as good as we’d like it to be but I want to remind you a few months ago, there were predictions, and — that the economy would shrink this quarter, not grow.”

Fortunes in the spring were significantly improved by two factors — the roughly $100 billion in tax rebate the government sent out to households, and the robust expansion of American exports.

The government unleashed the rebate checks to spur consumer spending, which amounts to 70 percent of the economy. Such spending expanded at a 1.5 percent annual rate between April and June, after growing at a meager 0.9 percent clip in the previous quarter. Economists estimated that as much as half of the growth in the spring was the result of Americans spending their rebates.

“Clearly the tax rebates did give some oomph to the economy,” said Robert Barbera, chief economist at the research and trading firm ITG.

Exports expanded at a 9.2 percent annual clip in the second quarter, up from 5.1 percent in the first three months of the year. Such sales have been enhanced by the weak dollar, which makes American-made goods cheaper on world markets.

Adding to the improving trade picture, imports dropped by an eye-catching 6.6 percent, as Americans tightened their spending. Imports are subtracted from overall economic growth, so the decrease weighs in as positive.

Over all, trade added 2.42 percentage points to the growth rate from April to June. Without that contribution, the economy would have contracted.

But many economists are dubious that either of these trends can continue in the face of substantial challenges to growth already entrenched in the United States, and gathering force in many major economies around the world. Japan and much of Europe now appear headed into downturns, dampening demand for American-made products.

“The trade improvement doesn’t look sustainable,” said Jan Hatzius, an economist at Goldman Sachs in New York. “In an environment where the global economy is clearly slowing, you’re not being able to get that export growth in future quarters.”

Economists said the sharp drop in imports was largely a function of retailers putting off wholesale purchases in the midst of acute fears about declining American spending power — a dynamic that should ultimately reverse.

“This reflects sheer panic by retailers about what the next Christmas buying season is going to look like,” said Mark Zandi, chief economist at Moody’s Economy.com.

Meanwhile, the tax rebates have mostly been distributed and spent. While the checks appear to have bolstered spending, they have failed to generate the sort of activity that is likely to lift the economy even after the cash cycles through, say economists. Cognizant that the rebates are a one-time event, employers have not hired aggressively amid the extra shopping, nor have businesses shelled out for new machinery. Indeed, investment for equipment fell 3.4 percent in the spring months, dropping for the second quarter in a row.

Even as spending increased, many companies declined to stockpile goods and, in fact, absorbed existing inventories. Over all, business inventories declined in the second quarter by $62 billion — a factor that shaved nearly 2 percent off the overall rate of economic growth.

The rebates “slowed the downturn, but it’s clear they didn’t really provide any spark,” Mr. Baker, the economist, said.

Once the impact of the checks wears off, American spending is expected to weaken considerably, as households confront the same, stubborn set of forces that have been impinging on the economy for many months — a deteriorating job market, rising prices for food and gas and plummeting housing values.

“Looking forward, I don’t think there’s anything to change the lousy trend for the domestic economy,” said Joshua Shapiro, chief domestic economist at MFR, a research firm.

In recent years, tens of millions of Americans have borrowed aggressively against the value of their homes to finance trips to the mall, dinners out, vacations and new cars. As housing values continue to fall, that artery of finance is constricting rapidly.

Since last summer, when the mortgage crisis provoked panic on Wall Street and many Americans saw their access to credit diminish severely, consumer spending on so-called durable goods like appliances, cars and furniture, has slid considerably. It barely grew in the last three months of 2007. It dipped at a 4.3 percent clip in the first three months of this year and slipped at a 3 percent pace in the second quarter.

For six months in a row, the economy has lost jobs. A report due out Friday will probably run that streak to seven. New unemployment claims in the week ending July 26 leapt 448,000 — well into levels consistent with a recession, and up 44,000 from the previous week.

Meanwhile, the Commerce Department reported that prices paid for goods by Americans surged at a 4.2 percent annual rate in the second quarter, after climbing at a 3.5 percent annual clip over the first three months of the year.

Higher prices, fewer paychecks and less household wealth does not make a recipe for free-spending ways.

“Now, consumers have to sing for their supper,” said Alan D. Levenson, chief economist at T. Rowe Price Associates, Inc. in Baltimore. “Spending growth is slowing and income growth is slowing, because job growth is negative.”

With the last three months of last year now officially showing an economic contraction, many economists saw in the data final confirmation that these tough times will officially be declared a recession. That label is affixed by a panel of economists at a private research institution, the National Bureau of Economic Research, though typically well after the fact.

Others say debate over whether this is a recession has been eclipsed by the troubles at hand.

“All my cousins already know it’s a recession,” said Mr. Barbera, the ITG chief economist. “They have the luxury of not having Ph.D.’s. The auto companies are in dire straits, the airlines have been shutting down flights and firing pilots. The truckers are in near hysteria because of the price of diesel. If you round up the usual suspects, this is a bad circumstance. And the word we usually use for a bad circumstance is a recession.”

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