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U.S. growth slows in the 2nd quarter

THE ECONOMY

GDP rises at a 1.5% annual rate, down from 2% in previous three months, as consumers pull back.

July 28, 2012|Don Lee

WASHINGTON — A weak second-quarter economic report made it clear that the country remains stuck in a painfully slow recovery for the foreseeable future.

Analysts now say that the economy for the rest of this year will look much like it does today, with the November election taking place in an economic middle zone -- neither robust growth nor a plunge into recession.

Fresh government data Friday confirmed that economic growth slowed in the second quarter as consumers, despite seeing relief from lower gasoline prices, pulled back on spending for cars and other big-ticket items.

The nation's gross domestic product, the value of all goods and services produced in the U.S., grew at a meager 1.5% annual rate in the April-to-June quarter. That was down from 2% in the first three months this year and 4.1% in the final quarter last year, the Commerce Department reported.

The slowdown in GDP was broad-based: Business investments expanded at a weaker pace; net exports were softer, thanks to flagging demand from Europe; and government spending cuts continued to be a drag on the economy.

Those conditions seem likely to persist through the rest of the year, though some significant risks remain, particularly the economic turmoil in Europe and next year's scheduled tax increases and federal spending cuts.

Even as stock markets surged this week on encouraging news from the European Central Bank -- the Dow Jones industrial average closed above 13,000 on Friday for the first time since early May -- experts don't see a quick resolution to the continent's deep fiscal and debt problems.

"Part of the rally is the market saying, 'Oh, there's not going to be a meltdown,' " said Stephen Auth, chief investment officer at money manager Federated Investors Inc. in New York.

Still, he added, "We've had a pretty good run mostly on air."

Mark Zandi, chief economist at economic research firm Moody's Analytics, said the latest GDP report offers more evidence that "it's going to be a struggle, a slog, over the next six to 12 months."

For President Obama and Republican challenger Mitt Romney, that probably means economic factors won't dramatically shift the current tight race one way or the other.

The slow growth is not good news for Obama, but neither is it the sort of terrible news likely to change the views of the roughly 90% of voters who have firmly made up their minds between the candidates.

Nor is it so dramatic that it would attract the attention of the remaining undecided voters, who tend to be people who follow news only sporadically.

"As a result, I think we're going to end up with a real nail-biter going up to Nov. 6," Auth said.

At the current GDP growth rate, the economy probably would add fewer than 100,000 new jobs a month, said Sung Won Sohn, an economist at Cal State Channel Islands. That means little change in the 8.2% unemployment rate.

"That's not enough to take care of new workers coming into the labor force, let alone rescue the unemployed," he said.

Second-quarter GDP growth was slightly better than the 1.3% rate that analysts had forecast. And if there was a silver lining in the mediocre performance, it's that the report further raised expectations that the Federal Reserve would step in with new stimulus, possibly as early as its next policy meeting Tuesday and Wednesday.

But many analysts don't see the Fed springing into action quite so quickly. And even then, economists believe the pace of economic growth is likely to stay sluggish through the end of this year and probably beyond that.

Mark Vitner, a senior economist at Wells Fargo Bank, said Friday's report showed a third straight quarter of businesses ramping up their inventory of goods, suggesting that they'll pull back in the coming months unless demand picks up. Vitner is projecting GDP growth of 1.5% for the rest of this year.

What's more, Vitner worries about the slowdown in corporate sales and earnings.

In fact, Friday's report from the Commerce Department showed that corporate profits in the prior three years weren't as strong as previously reported, something that analyst Zandi said could give employers less impetus to hire more workers.

Similarly, Commerce revisions Friday revealed that personal incomes didn't grow as fast as officials initially thought. Americans also didn't save as much money: The personal saving rate was revised down in each of the last three years, most sharply last year to 4.2% from 4.6%. The saving rate in the most recent second quarter was 4%.

The downward revision for prior years suggests that consumers may have less cushion for spending. Personal spending rose just 1.5% in the second quarter, down from a 2.4% increase in the first three months of the year. Consumer spending accounts for about two-thirds of U.S. economic activity.

Although there are signs that car sales rebounded in July, other reports indicate that consumer confidence remains fragile and that households will remain tightfisted.

"The good news is that consumers do not expect the economic slowdown to prompt an economy-wide recession," said Richard Curtin, director of the Thomson Reuters/University of Michigan consumer survey, which showed a drop in sentiment in July.

"The bad news is that consumers do not expect the pace of economic growth to revive job and income prospects."

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don.lee@latimes.com

Washington Bureau Chief David Lauter contributed to this report.

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