Image: Dino Curovac of Bread Basket Bakery pushes a cart of bread at the Phoenix Public Market in Phoenix
Joshua Lott  /  Reuters
Dino Curovac of Bread Basket Bakery pushes a cart of bread at the Phoenix Public Market in Phoenix, Ariz. The U.S. economy grew much slower than previously thought in the second quarter as business inventories and exports were less robust, a government report showed on Friday, although consumer spending was revised up. news services
updated 8/26/2011 2:30:45 PM ET 2011-08-26T18:30:45

The economy grew much slower than previously thought in the second quarter as business inventories and exports were less robust, a government report showed on Friday, although consumer spending was revised up.

Gross domestic product growth rose at annual rate of 1.0 percent the Commerce Department said, a downward revision of its prior estimate of 1.3 percent. It also said after-tax corporate profits rose at the fastest pace in a year.

Economists had expected the latest reading of GDP to be revised down to 1.1 percent. In the first quarter, the economy advanced just 0.4 percent. The government's second GDP estimate for the quarter confirmed growth almost stalled in the first six months of this year.

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Jan Hatzius, chief economist at Goldman Sachs Group, told CNBC that he now thinks that there is “a one in three” possibility of another recession.

The United States is on a recession watch after a massive sell-off in the stock market knocked down consumer and business sentiment. The plunge in share prices followed Standard & Poor's decision to strip the nation of its top notch AAA credit rating and a spreading sovereign debt crisis in Europe.

While sentiment has deteriorated, data such as industrial production, retail sales and employment suggest the economy could avoid an outright contraction.

William Larkin, portfolio manager with Cabot Money Management in Salem, Mass., said the GDP report was “in the gray area. It was ugly, but not a disaster. Had it been under 1 percent we'd have more of a psychological reaction.”

In a key speech at an annual economic conference in Jackson Hole, Wyo., Friday, Federal Reserve Chairman Ben Bernanke proposed no new steps to boost the economy, but did hint that Congress may need to act to stimulate hiring and growth.

In other economic news, U.S. consumer sentiment sank in August as consumers lost confidence in lawmakers' ability to stave off the threat of another recession, a survey released Friday showed.

The Thomson Reuters/University of Michigan's consumer sentiment index edged up from its mid-August level but was still consistent with recession-era lows. The index has only been lower in three other surveys, which were taken in April and May 1980 and November 2008.

The final August reading on the overall index of consumer sentiment was at 55.7, down from 63.7 the month before. It was slightly better than August's preliminary reading of 54.9, which had been the lowest level since May 1980.

Economists polled by Reuters had forecast a reading of 56.0.

Story: Bernanke proposes no new steps to boost the economy

"Consumers have shifted from being optimistic about the potential impact of monetary and fiscal policies to a sense of despair and pessimism about the role of the government," survey director Richard Curtin said in a statement.

Recent political wrangling over raising the U.S. debt ceiling appeared to take its toll. Spontaneous negative references to the government were made by 25 percent of respondents, above the prior record of 20 percent in April 2010.

The downward revisions to second-quarter growth came as businesses accumulated less stock than previously estimated. Business inventories increased $40.6 billion instead of $49.6 billion, cutting 0.23 percentage point from GDP growth during the quarter.

However, the slow build-up of inventories means goods are not piling up on shelves, which should support growth in the third quarter. Excluding inventories, the economy grew at a 1.2 percent rate.

Output was also curbed by exports, which grew at a 3.1 percent pace instead of 6.0 percent. Imports increased at a 1.9 percent rate rather than 1.3 percent. That left a slightly wider trade deficit and trade barely contributed to GDP growth. Trade had previously been estimated to have added 0.58 percentage point to overall output.

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The drag from business inventories was offset by consumer spending, which was revised up to a 0.4 percent rate from 0.1 percent. The increase in spending, which accounts for more than two-thirds of U.S. economic activity, was still the smallest since the fourth quarter of 2009.

Business spending was revised to a 9.9 percent rate of increase from 6.3 percent as investment in nonresidential structures and equipment and software was stronger than previously estimated. But there are fears that the recent stock market rout could make businesses a bit hesitant to spend on capital and hiring.

The report also showed that after-tax corporate profits increased 4.1 percent in the second quarter after edging up 0.1 percent in the first three months of the year. It also showed inflation pressures abating, with the personal consumption expenditures price index rising at a 3.2 percent rate. That compared to 3.9 percent in the first quarter.

The core PCE index closely watched by the Fed advanced at a 2.2 percent rate, the largest increase since the fourth quarter of 2009. It was revised up from 2.1 percent.

The Associated Press and Reuters contributed to this report.

Video: Goldman Sachs chief economist on outlook


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