MORE IN BUSINESS »By NEIL SHAH
The economy is slowing to a crawl as consumers cut back spending on big-ticket items and businesses curtailed investments, fueling fears that the U.S. could sink to stall-speed this year.Gross domestic product, the broadest measure of all goods and services produced in the economy, grew at a weak 1.5% annual rate, the Commerce Department said Friday -- a sharp slowing from the first quarter's 2% pace and the fourth quarter's 4.1%.The slowing economy, along with new government figures showing the recovery has been weaker than previously thought, raises the risk that a financial shock -- an escalation of Europe's economic crisis, say, or next year's scheduled tax increases and spending cuts, the so-called "fiscal cliff" -- could shove the economy back into recession. Weak growth could also prompt Federal Reserve officials to take more steps to boost the economy at upcoming meetings -- especially since there are few signs their efforts have fueled unwanted inflation."The economy is kind of being strangled," said Bob Baur, chief global economist at Principal Global Investors. "We underestimated how much uncertainty may have contributed to a lack of desire to expand and hire." Mr. Baur expects a 2% to 2.5% pace of growth in the second half and has "grown more cautious," he says.One of the biggest drags on the recovery is a lack of consumer spending, which accounts for roughly two-thirds of demand in the economy. Spending rose 1.5% in the second quarter, lower than the 2.4% pace in the first -- with buying of big-ticket items hurting the most. Retail sales have dropped three months in a row, while consumer confidence has wilted. A big factor is the weak labor market. Employers added fewer jobs in the second quarter than they have since the labor market began recovering in 2010. The unemployment rate, at 8.2%, has barely moved recently. And a severe drought in the Midwest is starting to push up food prices, which could make Americans less willing to spend.The report did contain some encouraging news. Sales of houses continued to contribute to the nation's growth, though the pace flagged from the first quarter. Despite Europe's problems and slowing in the rest of the world, U.S. exports rose 5.3% in the second quarter. Cutbacks by federal, local and state governments continued to drag down the economy, but eased from earlier this year. Some of this year's slowdown could also be the result of unusually heightened activity during the winter months given unseasonably warm weather.Still, the persistent unwillingness of consumers and businesses to spend and invest more despite historically low interest rates has economists and Federal Reserve officials worried about the coming months. Instead of spending, Americans are saving: The personal saving rate -- saving as a percentage of disposable personal income -- rose to 4% in the second quarter from 3.6% in the first, even though gasoline prices were falling.Businesses, meanwhile, aren't investing as confidently as earlier this year, with many citing uncertainty over U.S. fiscal and tax policies, global economic turmoil -- especially Europe -- and weak domestic demand. Companies Apple Inc. and Ford Motor Co. have blamed bad results on Europe's recession. Manufacturing has weakened in recent months, while new orders for nondefense capital goods, excluding aircraft -- a proxy for business investment -- fell 1.4% in June from a month earlier.Allan Pasternak, a founder of BAMCO Inc., a Middlesex, N.J., metal manufacturer, says his firm is doing brisk business but he's concerned about next year and proceeding carefully when using profits on investments."I really don't know what to expect," he says. "Our main concern is, is the economy going to experience another significant downturn." He also blames the "indecisiveness of our politicians, more than any of the actual policies" for creating uncertainty over government policies and crimping the ability of businesses to make decisions. BAMCO, for its part, is trying to be "lean and mean" and holding off on investing in new buildings even as business is growing.A few months ago, economists predicted growth would pick up in the second half of the year as America's job market improved, government cutbacks stopped hurting growth and the fall in the price of oil lowered gasoline prices. None of those have really happened. "The economy has lost a fair amount of momentum this year," noted Paul Dales, an economist at Capital Economics, which predicts only 2% growth this year, below the economy's long-term potential of around 2.5%. Among the new headwinds: The rise of the dollar, which makes it harder for U.S. exporters to sell their goods abroad and could hit corporate profits.The Commerce Department on Friday also said new revisions show the recovery from the 2007-2009 recession was weaker than previously thought. The recession, however, was a little milder than thought, largely thanks because rising government spending cushioned the blow.- U.S. Recovery Looks Weaker Than First Thought
- Government Kept Recession From Being Worse
- GDP Highlights: Inflation Data Won't Constrain Fed
Write to Neil Shah at neil.shah@dowjones.com
MORE IN BUSINESS »
By NEIL SHAH
The economy is slowing to a crawl as consumers cut back spending on big-ticket items and businesses curtailed investments, fueling fears that the U.S. could sink to stall-speed this year.
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Gross domestic product, the broadest measure of all goods and services produced in the economy, grew at a weak 1.5% annual rate, the Commerce Department said Friday -- a sharp slowing from the first quarter's 2% pace and the fourth quarter's 4.1%.
The slowing economy, along with new government figures showing the recovery has been weaker than previously thought, raises the risk that a financial shock -- an escalation of Europe's economic crisis, say, or next year's scheduled tax increases and spending cuts, the so-called "fiscal cliff" -- could shove the economy back into recession. Weak growth could also prompt Federal Reserve officials to take more steps to boost the economy at upcoming meetings -- especially since there are few signs their efforts have fueled unwanted inflation.
"The economy is kind of being strangled," said Bob Baur, chief global economist at Principal Global Investors. "We underestimated how much uncertainty may have contributed to a lack of desire to expand and hire." Mr. Baur expects a 2% to 2.5% pace of growth in the second half and has "grown more cautious," he says.
One of the biggest drags on the recovery is a lack of consumer spending, which accounts for roughly two-thirds of demand in the economy. Spending rose 1.5% in the second quarter, lower than the 2.4% pace in the first -- with buying of big-ticket items hurting the most. Retail sales have dropped three months in a row, while consumer confidence has wilted. A big factor is the weak labor market. Employers added fewer jobs in the second quarter than they have since the labor market began recovering in 2010. The unemployment rate, at 8.2%, has barely moved recently. And a severe drought in the Midwest is starting to push up food prices, which could make Americans less willing to spend.
The report did contain some encouraging news. Sales of houses continued to contribute to the nation's growth, though the pace flagged from the first quarter. Despite Europe's problems and slowing in the rest of the world, U.S. exports rose 5.3% in the second quarter. Cutbacks by federal, local and state governments continued to drag down the economy, but eased from earlier this year. Some of this year's slowdown could also be the result of unusually heightened activity during the winter months given unseasonably warm weather.
Still, the persistent unwillingness of consumers and businesses to spend and invest more despite historically low interest rates has economists and Federal Reserve officials worried about the coming months. Instead of spending, Americans are saving: The personal saving rate -- saving as a percentage of disposable personal income -- rose to 4% in the second quarter from 3.6% in the first, even though gasoline prices were falling.
Businesses, meanwhile, aren't investing as confidently as earlier this year, with many citing uncertainty over U.S. fiscal and tax policies, global economic turmoil -- especially Europe -- and weak domestic demand. Companies Apple Inc. and Ford Motor Co. have blamed bad results on Europe's recession. Manufacturing has weakened in recent months, while new orders for nondefense capital goods, excluding aircraft -- a proxy for business investment -- fell 1.4% in June from a month earlier.
Allan Pasternak, a founder of BAMCO Inc., a Middlesex, N.J., metal manufacturer, says his firm is doing brisk business but he's concerned about next year and proceeding carefully when using profits on investments.
"I really don't know what to expect," he says. "Our main concern is, is the economy going to experience another significant downturn." He also blames the "indecisiveness of our politicians, more than any of the actual policies" for creating uncertainty over government policies and crimping the ability of businesses to make decisions. BAMCO, for its part, is trying to be "lean and mean" and holding off on investing in new buildings even as business is growing.
A few months ago, economists predicted growth would pick up in the second half of the year as America's job market improved, government cutbacks stopped hurting growth and the fall in the price of oil lowered gasoline prices. None of those have really happened. "The economy has lost a fair amount of momentum this year," noted Paul Dales, an economist at Capital Economics, which predicts only 2% growth this year, below the economy's long-term potential of around 2.5%. Among the new headwinds: The rise of the dollar, which makes it harder for U.S. exporters to sell their goods abroad and could hit corporate profits.
The Commerce Department on Friday also said new revisions show the recovery from the 2007-2009 recession was weaker than previously thought. The recession, however, was a little milder than thought, largely thanks because rising government spending cushioned the blow.
- U.S. Recovery Looks Weaker Than First Thought
- Government Kept Recession From Being Worse
- GDP Highlights: Inflation Data Won't Constrain Fed
Write to Neil Shah at neil.shah@dowjones.com
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