Friday, July 27, 2012

Wary consumers, trade curb U.S. growth in Q2

(Reuters) — U.S. economic growth slowed as expected in the second quarter as consumers spent at their slowest pace in a year, potentially pushing the Federal Reserve closer to pumping more money into the economy.

Gross domestic product expanded at a 1.5 percent annual rate between April and June, the weakest pace of growth since the third quarter of 2011, the Commerce Department said on Friday.

First-quarter growth was revised up to a 2.0 percent pace from the previously reported 1.9 percent. Output for the fourth quarter was raised to a 4.1 percent rate from 3.0 percent.

"The economy is struggling to maintain altitude," said Robert Dye, chief economist at Comerica in Dallas. Dye made the comments before the release of the report.

The ailing economy could cost President Barack Obama a second term in office when Americans vote in November.

The expansion following the 2007-09 recession is the slowest since the 1980-81 period and the recession itself was the deepest in the post-war period, annual revisions to the data showed.

The weak second-quarter reading, which was in line with economists' expectations, could raise expectations of a third round of bond purchases, also known as quantitative easing, by the Fed.

No major policy announcement is expected at the Fed's two-day meeting next week, but many economists now say the central bank could move when policymakers gather on September 12-13.

The economy has been hit by worries of deep government spending cuts and higher taxes scheduled to kick in at the start of 2013, as well as troubles from the debt crisis in Europe.

The biggest factor weighing on the recovery is fear that politicians in Washington would be unable to avoid the so-called fiscal cliff at the turn of the year, economists said.

Recent economic data ranging from employment to manufacturing suggest limited scope for growth to bounce back in the third quarter.


Much of the slowdown in growth in the second quarter was caused by a softening in consumer spending as Americans eased off on automobile purchases due to tepid job and income growth.

Consumer spending, which makes up about 70 percent of U.S. economic activity, increased at a 1.5 percent rate, a step down from the 2.4 percent pace logged in the previous three months.

Consumer spending was the weakest in a year. Much of that reflected a drop in spending on long-lasting goods such as automobiles, which had buoyed consumption in the prior period.

But there was some silver lining, with spending on services rising at a 1.9 percent rate, stepping up from 1.3 percent.

Labor market weakness, marked by three straight months of job growth at less than 100,000 jobs per month, remains a major constraint to spending.

The economy needs to grow at a rate of between 2 percent and 2.5 percent to keep the unemployment rate stable.

Business inventories rose $66.3 billion in the last quarter, contributing nearly a third of a percentage point to GDP growth. However, with domestic demand slowing, businesses could find themselves with unwanted stock, which would hurt growth in the third quarter.

Excluding inventories, GDP rose at a 1.2 percent rate, the weakest pace since the first quarter of 2011. In the first quarter, the comparable figure was 2.4 percent.

Export growth pushed higher, despite slowing global demand, especially in Europe and China. But that was offset by a strong rise in imports. Trade subtracted almost a third of a percentage point from GDP growth.

Government spending contracted for an eighth straight quarter, but the pace of decline slowed. Defense spending fell marginally after two quarters of hefty declines.

There was no relief from state and local government spending, which has been a drag through much of the recovery. State and local government spending fell at 2.1 percent rate after dropping 2.2 percent in the first quarter.

Housing - the Achilles heel of the U.S. economy for six years - increased at a 9.7 percent rate, slowing from the prior period's weather-related 20.5 percent surge.

Business spending on equipment and software rose at a 7.2 percent rate.

With demand weak, inflation pressures subsided during the quarter. A price index for personal spending rose at a 0.7 percent rate, the lowest rate since the second quarter of 2010, after rising 2.5 percent in the first quarter.

A core measure that strips out food and energy costs advanced at a 1.8 percent rate, moderating from 2.2 percent in the prior quarter.

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