Consumers pare spending, and business investment slows
By Jeffry Bartash, MarketWatch
WASHINGTON (MarketWatch) — The U.S. economy took a turn for the worse in the spring as consumers pared spending and businesses invested at a slower pace, with little sign that growth will accelerate sharply anytime soon.
Gross domestic product, the value of all goods and services produced in the U.S., rose at a tepid 1.5% clip in the second quarter, the Commerce Department reported Friday. Economists surveyed by MarketWatch had forecast the economy to expand by 1.3%.
Most sectors of the economy downshifted in the second quarter, whose growth was sharply lower compared to the prior two periods. The U.S. grew a revised 2.0% in the first quarter and 4.1% in the last three months of 2011.
Newly revised government data on Friday also showed that the recovery following the end of the 2007-2009 recession was not as strong as initially reported. Nor was the downturn — the worst since the Great Depression — quite as deep.
Inflation, meanwhile, remained relatively tame. A measure of inflation linked to consumer prices fell to 1.8% from 2.4% in the prior quarter. Lower inflation give the Federal Reserve more room to act if the central bank decided the economy needs another boost. Many economists believe the central bank will undertake another round of stimulus if growth doesn’t pick up.
U.S. stock futures SPU2 +0.35% pointed to a stronger start, with the market little moved in the immediate aftermath of the GDP report.
Consumers reduce spending
In the second quarter, consumer spending decelerated to a 1.5% clip from 2.4% in the first three months of the year. Consumer spending is by far the single biggest driver of economic growth.
Consumers cut back on an array of goods and services as retail sales fell in all three months of the quarter, the first time that’s happened since the recession. Popular coffee retailer Starbucks SBUX -9.68% , for example, said sales slowed toward the end of the second quarter in a sign that consumers may have cut back on items they can go without or sought cheaper alternatives.
Although gas prices fell last quarter and inflation-adjusted disposable income rose 3.2%, consumers chose to save more money. The savings rate climbed to 4.0% from 3.6%.
The greater willingness of consumers to save may reflect their worries about the lack of available jobs — the unemployment rate increased during the second quarter for the first time in nearly a year, to 8.2%. The threat of the financial crisis in Europe spreading to the U.S. may also have sapped the confidence of consumers.
Another drag on growth was lower government spending, which fell 1.4% at all levels. Federal outlays dropped 0.4% and state and local spending fell a steeper 2.1%.
Businesses, for their part, showed more caution. Investment in a wide range of nonhousing-related goods, ranging from TVs to factories, slowed to a 5.3% rate from 7.5% in the first three months of the year.
At the same time, inventories climbed to an estimated $66.3 billion in the April-to-June period — higher than in the first quarter but less than in the fourth quarter.
In a positive sign, exports rose by the fastest rate in three quarters, up 5.3%. Yet imports rose even faster at 6.0%. Imports subtract from GDP.
Whether exports continue to expand is unclear amid a recession in parts of Europe and declining growth in China and other emerging markets. A number of large technology companies, such as giant chipmaker Intel, said they expect grow to slow in the coming months. Intel CEO Paul Otellini cited a “more challenging macroeconomic environment” after the company released second-quarter earnings.
Waning growth at home and abroad, in turn, has spurred some large companies to scale back plans for hiring and investment. As a result, the U.S jobless rate could remain stuck in the 8% range and act as a deterrent to faster domestic growth.
The key to a faster growth, analysts say, is a quicker pace of hiring that injects more cash into the economy and drums up demand for the goods and services produced by America’s businesses.
The slower pace of growth in the second quarter is sure to elicit criticism from Republicans and the party’s presumed presidential nominee, Mitt Romney.
Republicans blame President Obama for the weak recovery from the 2007-2009 recession. They hope to recapture the White House in the November election based on public dissatisfaction with the fragile economy.
Jeffry Bartash is a reporter for MarketWatch in Washington.
