The economic recovery was weaker than originally estimated in the second quarter and analysts have now revised forecasts for third quarter growth down also.
Gross domestic product growth, the measure of total goods and services output within U.S. borders, was revised down to only 1.6 percent, from 2.4 percent, the Commerce Department said. The economy grew at a 3.7 percent pace in the first quarter of 2010.
Many economists had forecast an even bigger downward revision to only 1.4 pct growth, but most still do not believe the economy will slide back into recession and say the most likely prospect is for continued slow expansion.
The outlook continues to be one of modest growth rather than double dip. The question remains whether subpar growth that fails to bring down the unemployment rate is a high enough bar for further Fed policy action, said Julia Coronado, an economist at BNP Paribas in New York.
Second quarter growth was dampened by the largest increase in imports in 26 years, but robust business investment and a slight increase in consumer spending partially cushioned the blow.
Federal Reserve Chairman Ben Bernanke told central bankers at their annual conference in Jackson Hole, Wyoming on Friday that the recovery had weakened more than expected and reiterated the U.S. central bank was ready to take further steps if needed to spur economic growth.
The committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly, he said.
The better-than-expected second quarter growth figure and Bernanke's commitment to aid the economy helped U.S. stocks to post their biggest gains in nearly four weeks. But the U.S. Treasury debt market suffered its largest sell-off in three months after recent rally. The U.S. dollar ended slightly weaker against most major currencies.
U.S. economic data for July have so far been downbeat and a Reuters survey of economists on Friday forecast third-quarter growth at a 1.7 percent rate, down from expectations of 2.4 percent just over two weeks ago. The chances of a double-dip recession rose to 25 percent from 15 percent.
BAD POLITICAL OMEN
A slackening recovery poses a political challenge for the Obama administration and the Democratic Party a little over two months away from mid-term elections that could shift the balance of power in Congress in favor of Republicans.
A Reuters/Ipsos poll this week found Obama's approval rating at 45 percent, overtaken for the first time by a 52 percent disapproval rating.
The White House said four straight quarters of growth were encouraging, adding the administration was focusing on a raft of measures, including help for small businesses and promotion of exports.
The U.S. economy's recovery from its worst economic downturn since the Great Depression of the 1930s had been largely fueled by an $862 billion government stimulus package and businesses rebuilding inventories from record low levels.
A record budget deficit makes it unlikely the government will inject more money to shore up the economy.
While growth in the United States is slowing, output in other industrialized nations is holding up. Britain's economy grew at its fastest pace in nine years in the second quarter on strong construction activity.
BIGGER TRADE DEFICIT REDUCES GROWTH
Growth in the last quarter was stifled by a 32.4 percent surge in imports, the largest since the first quarter of 1984, dwarfing a 9.1 percent rise in exports. That created a trade deficit, which cut 3.37 percentage points from GDP, the largest subtraction since the fourth quarter of 1947.
The growth in imports is across the board. The strong demand for imports indicates there is pent up demand out there, but for growth it's negative because exports are not keeping pace, said Gus Faucher, director of macroeconomics for Moody's Economy.com in West Chester, Pennsylvania.
A smaller contribution than initially estimated from business inventories, which had been a major driver of the recovery that started in the second half of 2009, also restrained output.
Business inventories increased $63.2 billion, rather than the previously estimated $75.7 billion, after increasing $44.1 billion in the first three months of the year.
CONSUMER SPENDING UP
There were some bright spots in the report though, with growth in consumer spending revised up to a 2.0 percent rate from 1.6 percent. Consumer spending grew at a 1.9 percent pace in the first quarter. High unemployment is hurting spending.
A private survey showed consumer sentiment pulled back in late August from earlier in the month but still improved from late July.
Although businesses have held back on hiring, they have been splurging on equipment and software.
Business investment was revised up to a 17.6 percent growth rate, the largest increase since the first quarter of 2006, from the previously estimated 17 percent. Investment in equipment and software was the strongest since the fourth quarter of 1983.
The report also showed corporate profits rose 2.9 percent in the second quarter after increasing 5.8 percent in the first three months of the year.
(Additional reporting by Jeff Mason, Editing by Chizu Nomiyama)