US Economy Expanded at Weak 1.5 Pct. Pace in Second Quarter

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The struggling economy grew at a 1.5 percent pace in the second quarter, the government reported today, confirming a slowdown that has seen companies curtail hiring and investment as consumers cut spending.

The Commerce Department's release of its first advanced estimate of U.S. gross domestic product (GDP) in the second quarter is being closely watched by economists. The turmoil in Europe over the faltering euro and indebted governments has spilled over to the US, which is battling unemployment that has been over 8 percent since the recession of 2007-08.

"The economy is not falling off a cliff, but it's not strong either," said Scott Brown, chief economist with investment firm Raymond James.

This is the slowest recovery from a recession since at least 1960 -- half the pace of recessions in previous periods. The economy, which must grow at a 4 percent annualized pace or better to bring unemployment down, has been the No. 1 topic in the upcoming presidential election.

"The GDP numbers for this quarter are somewhat disappointing because, at this point in a normal recovery cycle, we would want the real GDP number at consistently more than 3 percent," said Brian Hamilton, CEO of Sageworks. "The GDP numbers are a little surprising given that our data continues to show strong growth in private company revenue. It looks as if government sector growth and growth in imports are dragging down GDP. Until GDP is consistently over 3 percent, our fear is that job growth will not be significant."

The Commerce department also revised GDP growth for the first quarter of this year from 1.9 percent to a slightly higher 2.0 percent. Today's report showed that household consumption rose at a 1.5 percent pace from April through June, down from 2.4 percent in the first quarter.

"It's the advanced estimate so the government doesn't have all the pieces of the puzzle," Brown said, such as estimates about foreign trade. "Very often we will see very large revisions later."

Brown expected to see slower growth in the second quarter.

Economists expected a consensus 1.4 percent growth in the second quarter, as reported by Bloomberg, compared with 1.9 percent growth in the first quarter.

"Part of that is the weather story," Brown said.

With the unusually mild winter, consumers and businesses may have spent more in the previous quarters and may have withheld some spending in the second quarter and later this year.

"You see it in retail and jobs numbers, even auto sales numbers, which were unseasonably strong in the first quarter," Brown said.

Because retail sales numbers were weak in May and June, Brown said he expects the consumer spending component of GDP to be weaker.

The slower European economies may also contribute negatively to the foreign trade component of GDP, with slower growth in exports, Brown said.

"It's not a huge effect just yet. I think it will show up more in the second half of the year," Brown said.

Many industries reported weakness in orders from Europe during the second quarter earnings season.

"In general, the theme has been a cautionary outlook on global growth," Brown said. "In terms of business' fixed investment, one concern is uncertainty. The election, fiscal cliff, and Europe may weigh on businesses waiting to expand at this point."

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