Cautious consumers, foreign trade curb second quarter growth

WASHINGTON (Reuters): Economic growth slowed in the second quarter as consumers spent at their slowest pace in a year, increasing pressure on the Federal Reserve to do more to bolster the recovery.

Gross domestic product expanded at a 1.5% 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% to a 2.0% pace.

Details of the report were weak, with foreign trade being a drag and stocks of unsold goods rising. That, together with signs that activity slowed further early in the third quarter strengthens the argument for the Fed 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.

An Ipsos/Thomson Reuters poll published last week showed 36% of registered voters believe Republican candidate Mitt Romney has a better plan for the economy, compared to 31% who had faith in Obama’s policies.

In a nod to the darkening economic outlook, the White House on Friday cut its growth estimate for this year to 2.3% from 2.7% back in February. The growth forecast for 2013 was pared to 2.7% from 3.0%.

The economy’s 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.

However, there is a chance the Fed could push further into the future its conditional pledge to keep rates near zero through late 2014, economists said.

The U.S. central bank has already injected $2.3 trillion into the economy through asset purchases and slashed overnight interest rates to 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 a sufficient condition on its own. They said the Fed would want to save its limited arsenal for a real crisis.

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. Third-quarter growth is forecast at a rate between 1 and 1.5%.

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% of U.S. economic activity, increased at a 1.5% rate, a step down from the 2.4% pace logged in the previous three months.

Consumer spending was the weakest in a year.

The outlook for spending is not promising. Worries over jobs and income pushed consumer sentiment to its lowest level in a year in July, 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% in June. The economy needs to grow at a rate of between 2% and 2.5% just to keep the unemployment rate stable.