US consumers, foreign trade curb second quarter growth
US 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 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, 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.
A poll published last week showed 36 percent of registered voters believe Republican candidate Mitt Romney has a better plan for the economy, compared to 31 percent 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 percent from 2.7 percent back in February. The growth forecast for 2013 was pared to 2.7 percent from 3.0 percent.
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 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, a senior 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 socalled fiscal cliff at the turn of the year, economists said. Third-quarter growth is forecast at a rate between 1 and 1.5 percent. Expectations of further monetary stimulus fueled a rally on Wall Street, with the Dow Jones industrial average closing above 13,000 for the first time since May 7. The Standard & Poor's 500 index touched its highest level in nearly three months.