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US economic growth slows in second quarter

Text by News Wires

Latest update : 2012-07-27

Sharp spending cuts saw US economic growth slow to an annual rate of 1.5 per cent in the second quarter, reports showed on Friday. The bleak results added to concerns over the health of the economy three years after it emerged from recession.

AP - U.S. economic growth slowed to an annual rate of just 1.5 percent from April through June, as Americans cut back sharply on spending. The weaker growth adds to worries that the economy could be stalling three years after the recession ended.

The report is troubling news for President Barack Obama, whose prospects of winning re-election in November could hinge largely on the health of the economy, the top issue for voters.

The Commerce Department also said Friday that the economy grew a little better than previously thought in the January-March quarter. It raised its estimate to a 2 percent rate, up from 1.9 percent.

Growth at or below 2 percent isn’t enough to lower the unemployment rate, which was 8.2 percent last month. And most economists don’t expect growth to pick up much in the second half of the year. Europe’s financial crisis and a looming budget crisis in the U.S. are expected to slow business investment further.

“The main take away from today’s report, the specifics aside, is that the U.S. economy is barely growing,” said Dan Greenhaus, chief economic strategist at BTIG LLC. “Along with a reduction in the actual amount of money companies were able to make, it’s no wonder the unemployment rate cannot move lower.”

Some economic data improved over the course of the April-June quarter, while others worsened. Hiring, for example, rose slightly from April to May to June. But home sales weakened.

Stocks rose as investors to shrug off the weak U.S growth and focus on a pledge from the European Central Bank president to keep the euro together. The Dow Jones industrial average increased 113 points in midday trading, and broader indexes also gained.

The lackluster economy is raising pressure on Obama in his re-election fight with Mitt Romney, the presumptive Republican presidential nominee.

But few think the Fed, the White House or Congress can or will do anything soon that might rejuvenate the economy quickly. Many lawmakers, for example, refuse to increase federal spending in light of historically large budget deficits.

Paul Dales, senior U.S. economist at Capital Economics, said that the sluggish second-quarter growth rate is probably not weak enough to trigger more action by the Federal Reserve when it meets next week.

Many economists, however, believe the Fed will launch another round of bond buying at its September policy meeting. The aim is to drive long-term interest rates lower and encourage more borrowing and spending.

Glenn Hubbard, economic adviser for Romney, said Friday’s report on growth was largely what economists were expecting. “But those expectations themselves and the report itself were actually quite disappointing,” he noted.

“At that pattern, the economy simply will never return to full employment,” he said.
Alan Krueger, chairman of the White House Council of Economic Advisers, said the report showed the economy grew for the 12th straight quarter.

Congress could strengthen growth and job creation by adopting Obama’s plan to extend expiring tax cuts for all but the wealthiest Americans, Krueger said.

Republicans want the tax cuts extended for all Americans.

The 1.5 percent growth rate in the second quarter was the weakest since
the economy, as measured by the gross domestic product, expanded at a 1.3 percent rate in the July-September quarter last year. GDP measures the country’s total output of goods and services, from the purchase of a cup of coffee to the sale of fighter jets.

Current-dollar GDP increased at an annual rate of $117.6 billion in the second quarter to $15.6 trillion.

Growth was weaker mostly because consumer spending slowed to a growth rate of just 1.5 percent. That’s down from 2.4 percent in the first quarter. Americans bought fewer autos, computers and other long-lasting manufactured goods. Spending on services increased.

They also saved more. The savings rate increased to 4 percent, up from 3.6 percent in the first quarter.

Consumer spending drives roughly 70 percent of economic activity.

Nigel Gault, chief U.S. economist at IHS Global Insight, said consumer
spending is likely to remain subdued in the second half of the year, holding economic growth at or below 2 percent. Gas prices have stopped falling – and have even started to rise in recent weeks. And this summer’s severe drought is expected to push food prices higher toward the end of the year.

“There is really no reason to see us pulling out of this malaise any time soon,” Gault said. “I am not calling for a recession, but I am calling for weak growth.”

The U.S. economy has never been so sluggish this long into a recovery. The Great Recession officially ended in June 2009.

Until a few weeks ago, many economists had been predicting that growth would accelerate in the final six months of the year. They pointed to gains in manufacturing, home and auto sales and lower gas prices.

But threats to the U.S. economy have left consumers too anxious to spend freely. Jobs are tight. Pay isn’t keeping up with inflation. Retail sales fell in June for a third straight month. Manufacturing has weakened in most areas of the country.

Fear is also growing that the economy will fall off a “fiscal cliff” at year’s end. That’s when tax increases and deep spending cuts will take effect unless Congress reaches a budget agreement.

All that is making companies reluctant to expand and hire much.

Weaker growth in consumer spending was offset in the second quarter somewhat by a slightly smaller drag from government spending. Spending at the state, local and federal level fell at an annual rate of 1.4 percent in the second quarter – just half of the 3 percent rate of decline in the first quarter.

The Commerce Department also revised its growth estimates for the past three years. Those revisions showed that the economy contracted 3.1 percent in 2009, slightly less than the 3.5 percent previously reported. Growth in 2010 was put at 2.4 percent, down from 3 percent, with growth in 2011 at 1.8 percent instead of 1.7 percent.
 

Date created : 2012-07-27

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