Economy slows; a 2d slump is feared

Fed chairman vows a vigorous response

By Erin Ailworth
Globe Staff / August 28, 2010

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Ben S. Bernanke, the Federal Reserve chairman, said yesterday that he is prepared to act to prop up the economy, following a government report that economic growth in the second quarter was much slower than previously estimated, renewing fears of a second recession.

The revised estimate of economic output from the US Commerce Department yesterday showed that gross domestic product grew at an anemic 1.6 percent annual rate from April to June, down from the original estimate of 2.4 percent, and significantly below the pace of growth in the first quarter.

It was the second worrisome signal this week that business and consumer activity across the country are slumping. On Tuesday the nation’s real estate industry reported that July home sales plunged much more deeply than expected following the expiration of the federal home buyer tax credit, suggesting the housing market is too weak to sustain growth without help from the government.

Confronted with the growing danger signs, Bernanke, the nation’s top banker, in a speech at a conference in Jackson Hole, Wyo., said he would take aggressive steps — from maintaining low interest rates to directly purchasing securities — if needed to steer the economy back to a growth path. Such actions by the Fed help lower borrowing costs and improve the investment climate for business consumers.

“Should further action prove necessary, policy options are available to provide additional stimulus,’’ Bernanke said. Wall Street, which was expecting even worse economic news, was heartened by Bernanke’s promise of help, especially since Congress probably will not approve another federal stimulus spending package. The Dow Jones industrial average closed yesterday at 10,150.65, up 1.65 percent.

Bernanke’s message was clear, said Brian Bethune, chief US financial economist at IHS Global Insight in Lexington: The Fed has more cards to play.

“The fat lady on the Fed stage has not sung yet,’’ said Bethune, who called Bernanke’s statements “encouraging.’’

Still, the dire scenario of a double-dip recession — where the economy stops growing, then contracts back into recession after a short period of recovery — is increasing its hold within the economic community.

Robert Shiller, a professor of economics at Yale and cocreator of the Case-Shiller Home Price Indices, said that the economy generally is able to ride out temporary setbacks and heal itself.

“This time, I’m worried that it won’t, that we’ll have another recession,’’ he said, adding that he sees a strong likelihood of a double-dip recession. “Unemployment seems to be stuck at an extremely high level.’’

The nation’s unemployment rate, at 9.5 percent in July, has more than doubled from a low of 4.4 percent in mid-2007, before the start of the recession.

Martin Feldstein, a Harvard University economics professor and president emeritus of the National Bureau of Economic Research, said in an e-mail that yesterday’s report from the Commerce Department showed that demand barely budged from the first to the second quarter. He has warned against allowing the tax cuts enacted under President George W. Bush to lapse at the end of the year.

“It would not take much for that to be negative,’’ he said. “We have housing and business investment problems in the months ahead. A rise in tax rates in January could be a major blow to the economy.’’

Even as he offered his assurances, Bernanke acknowledged that the economy has been growing too slowly to make a real dent in unemployment.

“The concern is that if job growth doesn’t pick up, consumers are going to get anxious and they’re going to pull back again and we’re going to fall into a double-dip recession,’’ said Gus Faucher, an economist at Moody’s Analytics.

The National Bureau of Economic Research, the Cambridge nonprofit that officially dates US business cycles, has not determined when the recent recession came to an end, although most economists believe it was about a year ago. The New England Economic Partnership, a nonprofit research and forecasting group, estimates that, in Massachusetts, the recession began in May 2008, and ended last August. A recession is commonly defined as two consecutive quarters of negative economic growth, but NBER uses a broader definition.

In the early 1980s, the nation experienced a double-dip when the country emerged from a six-month recession in July 1980, then fell back into recession a year later. The second recession lasted 16 months, until November 1982.

Alan Clayton-Matthews, an economist at Northeastern University, said several factors are contributing to the economy’s slowdown, including tepid economic growth in Europe and China, and, closer to home, the ebb in consumer spending as people who are worried about their jobs try to save more.

“There are a lot of households on very tight budgets, and businesses are now worried that the consumer won’t reenter the economy, and so therefore, why expand?’’ Clayton-Matthews said. “The national economy is getting close to the edge of slow growth and slipping into no growth.’’

And despite three successive quarters of very strong growth in Massachusetts, several local economists said, if the national economy worsens, the state’s economy will follow. That’s because Massachusetts companies sell goods and services across the United States, tying the state’s fortunes to those of the country as a whole.

“At some point, the slowing of the national economy has to take its toll in the Commonwealth,’’ said Mike Goodman, professor of public policy at the University of Massachusetts Dartmouth.

Globe staff writer Robert Gavin contributed to this report. Erin Ailworth can be reached at