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article imageU.S. economic growth withers in second quarter

By Larry Clifton     Jul 27, 2012 in Politics
Washington - As President Obama campaigns in hopes of convincing Americans he has earned another four-year term in office, the U.S. economy is weakening.
U.S. GDP plunged in the second quarter to the lowest level since 2011 as consumers, slammed by rising food prices and a weak economy rife with layoffs and pay cuts, spent at the lowest pace in a year, according to a Rueters report.
Gross domestic product expanded at an anemic 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 to a 2.0 percent pace from the previously reported 1.9 percent. Output for the fourth quarter was raised to a 4.1 percent rate from 3.0 percent, and the second quarter sends a particularly distressing signal for the second half of 2012.
"This is the sign...that policymakers must act to provide more support to the economy if they want it to grow fast enough to start putting sustained downward pressure on today's still too-high unemployment rate," said Josh Bivens, research and policy director at the Economic Policy Institute.
As more Americans feel the ailing economy in their pocketbooks and wallets President Barack Obama is touting an economic recovery that many no longer believe exists.
The economic 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, annual revisions to the data confirmed. Many say the Obama team is ill-prepared to lead the country out of financial turmoil.
The weak second-quarter reading could set off a third round of bond purchases, also known as quantitative easing, by the Federal Reserve.
No major policy announcement is expected at the Fed's two-day meeting next week, but many economists now say the central bank could move when policymakers gather on September 12-13.
"The Fed may unleash another round of quantitative easing soon, but the real question is how much positive impact it will have amid a backdrop of ongoing household deleveraging," said Kathy Bostjancic, an economist at the Conference Board.
The economy has been hit by spending cuts contrasted by heavy deficit spending during the first two years of the Obama administration as well as troubles from the debt crisis in Europe.
Recent employment and manufacturing data suggest the U.S. economy may not bounce back in the third quarter.
Stock index futures held gains after the GDP report, while Treasury debt prices extended losses. The dollar rose against the yen.
Consumers have largely hunkered down due to tepid job and income growth causing automobile purchases to decrease sharply.
Consumer spending, which makes up about 70 percent of economic activity, increased at a weak 1.5 percent rate, a stepping down from the 2.4 percent pace logged in the previous three months.
But there was some silver lining, with spending on services rising at a 1.9 percent rate, stepping up from 1.3 percent. Analysts say people are holding on to their autos and appliances longer causing factory output to lag while increasing spending on services.
Labor market weakness, marked by three straight months of job growth at less than 100,000 jobs per month, remains a major constraint to spending. The unemployment rate was 8.2 percent in June.
The economy, at 1.5 percent, is no longer growing fast enough to keep the unemployment rate stable.
"We are a long way from the 4 percent growth that the Fed would like to see. The economy needs to make good progress in bringing unemployment down," said Avery Shenfeld, an economist at CIBC World Markets in Toronto, as quoted in NewsMax.
In the second quarter, cautious Americans opted to save for a rainy day, pushing the saving rate up to 4 percent from 3.6 percent in the first three months of the year, the highest in a year.
Business inventories rose $66.3 billion in the last quarter, contributing nearly a third of a percentage point to GDP growth. However, with domestic demand slowing, businesses could find themselves with unwanted stock, which would hurt growth in the third quarter.
Government spending contracted for an eighth straight quarter, but the pace of decline slowed. Defense spending fell marginally after two quarters of hefty declines.
There was no relief from state and local government spending, which has been a drag through much of the recovery. State and local government spending fell at 2.1 percent rate after dropping 2.2 percent in the first quarter.
Even with these contractions, deficit spending remains rampant, suggesting the way tax dollars are being dispersed is not helpful to the overall economy.
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