U.S. 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.
An Ipsos/Thomson Reuters 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.
FED MAY KEEP POWDER DRY
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 Sept. 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 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 percent.
Stocks on Wall Street rallied on expectations of further monetary stimulus, with the Dow Jones industrial average vaulting above the 13,000 mark. However, Treasury debt prices fell as the GDP report was in line with economists' expectations. 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. Auto buoyed consumption in the prior period.
Ford Motor Co this week said that because of cooling demand it now expected industry wide U.S. auto sales to be at the lower end of its forecast of 14.5 million to 15 million vehicles, including medium- and heavy-trucks.
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 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 pocketed money from falling gasoline prices in the second quarter, pushing the saving rate up its the highest level in a year.
INVENTORY LIQUIDATION LOOMING
While business inventories contributed nearly a third of a percentage point to GDP growth, slowing domestic demand means businesses could find themselves with unwanted stock. That would be a drag on third-quarter growth.
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.
Weak demand muzzled inflation pressures during the quarter. A price index for personal spending rose at a 0.7 percent rate, the lowest pace 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.