Cautious consumers, Developing street vendors

Economic growth slowed in the second quarter as consumers spent at their slowest pace in a year, increasing pressure on policymakers to do more to bolster the recovery.

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 by a tenth of a percent to a 2.0 percent pace.

Details of the report were weak. That, together with signs that activity slowed further early in the third quarter strengthens the argument for the Federal Reserve to offer the economy additional stimulus at its September meeting.

"The economy has lost altitude and flying pretty close to stall speed. Monetary policy is the only game in town and additional easing is highly likely," said Sung Won Sohn, an economics professor at California State University Channel Islands in Camarillo, California.

The ailing economy could cost President Barack Obama a second term in office when Americans vote in November. Obama's approval rating on his handling of the economy is slipping.

A CBS News/New York Times poll published last week showed 39 percent of respondents approved of Obama's economic leadership while 55 percent disapproved. That represented a worsening from April, when 44 percent approved of the president's economic stewardship while 48 percent disapproved.

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.

No major policy announcement is expected at the Fed's two-day meeting next week, but many economists now say the central bank could launch a third round of bond purchases, also known as quantitative easing, when policymakers gather on September 12-13.

The U.S. central bank has already injected $2.3 trillion into the economy through asset purchases and overnight interest rates are near zero.

But not all economists believe the Fed will pump more money into the economy in September, arguing that the slowdown in growth was not that alarming. They said the Fed would want to save its limited arsenal for a real crisis.

"The Fed will pull the trigger on QE3 if the sense is we are getting into trouble, but if we are just weak and somewhat limping forward, they will prefer to stay pat," said Adolfo Laurenti, deputy chief economist at Mesirow Financial in Chicago.

"They do not want to use whatever ammunition they have left too soon, they want to keep some just because things might get even worse later on."

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 will be unable to avoid the so-called fiscal cliff at the turn of the year, economists said.

The report, which was in line with economists' expectations, helped to lift stocks on Wall Street, while Treasury debt prices extended losses. The dollar rose against the yen.

CONSUMERS HUNKER DOWN

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 outlays for long-lasting goods such as automobiles, which had buoyed consumption in the prior period.

Consumer sentiment tumbled to its lowest level in a year in July as households fretted over jobs and income prospects, a second report showed. The Thomson Reuters/University of Michigan's consumer sentiment index fell to 72.3 this month from 73.2 in June.

Employment growth averaged 75,000 jobs a month in the second quarter, compared to an average monthly increase of 226,000 in the first three months of the year.

The unemployment rate was 8.2 percent in June. The economy needs to grow at a rate of between 2 percent and 2.5 percent just to keep the unemployment rate stable.

Wary of the economic outlook, Americans saved money from falling gasoline prices in the second quarter, pushing the saving rate up its the highest level in a year.

Business inventories contributed 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.

"The inventory build was larger than we thought, I think that's going to come at the expense of growth this quarter," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester Pennsylvania.

"You take in the drought, and I think that's going to hurt farm inventories. It's getting more and more difficult to identify a spark for the economy."

Export growth pushed higher, despite slowing demand in Europe and China, but it 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.

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 picked up from the prior quarter, but indications are that it will slow in the third quarter.

Weak demand muzzled inflation pressures 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. (http://www.reuters.com)