Economy Is in No Shape for Debt-Ceiling Games: The Ticker

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By Mark Whitehouse

If legislators needed a reminder that now is not the time to be playing games with the U.S. economy, they received it today in the Commerce Department's latest report on growth.

Two years after it hit bottom in mid-2009, the economy has yet to regain the losses it suffered in the recession (see chart), revised data from the Commerce Department show. In inflation-adjusted terms, U.S. output in the second quarter of 2011 was still 0.4 percent below its most recent peak in the fourth quarter of 2007.

The new data show that the economy nearly stagnated in the first quarter of this year, growing at an annualized, inflation-adjusted rate of only 0.4 percent. Excluding the change in inventories -- which showed businesses accumulating stuff at a faster rate -- the economy actually did stagnate. In the second quarter, growth accelerated to only 1.3 percent, well below its potential and not fast enough to make a dent in unemployment.

Given the U.S. economy's weakness, it wouldn’t take much of a shock to knock it back into recession. Just ask the Japanese. Back in the 1990s, the government made a big policy mistake, sharply raising taxes at about the same time the Asian financial crisis hit. Result: The Japanese economy dipped back into recession.

U.S. legislators are on the verge of making a similar policy mistake by failing to raise the debt ceiling -- or by passing front-loaded spending cuts -- at a time when Europe's debt problems are still threatening to develop into a full-blown financial crisis. Let’s hope the latest data on the economy curb their appetite for self-destruction.

-0- Jul/29/2011 17:11 GMT