Economy growing at slowest pace since recession

WASHINGTON – The economy likely grew in the first half of the year at the slowest pace since the recession ended, and the second half isn't looking much better.

Weak consumer spending, dismal hiring and cuts in government spending likely held back growth in the April-June quarter. The government will report on second-quarter growth on Friday.

Economists forecast the economy expanded at an annual rate of 1.7 percent, according to a FactSet survey. That follows a 1.9 percent growth rate in the first three months of the year. Those are the slowest back-to-back quarters since the economy began recovering from the recession two years ago.

Even if the economy picks up later this year, growth in 2011 will likely be slower than the 2.9 percent expansion last year. Economists at RBC Capital Markets, for example, forecast growth of 2.3 percent this year.

Complicating an already-weak economy is the debt crisis in Washington. No matter what lawmakers do to resolve that crisis, their decision will likely slow growth in the short term. A deal to raise the borrowing limit would likely include long-term spending cuts, which would withdraw government stimulus at a precarious time. If Congress fails to raise the borrowing limit and the government defaults on its debt, financial markets could fall and interest rates could rise.

Most economists expect growth to pick up slightly in the second half of the year, as the impact of high gas prices and supply disruptions stemming from Japan's March 11 earthquake ease. But growth won't be strong enough to lower the unemployment rate, now 9.2 percent.

"We're starting off the quarter in weaker shape than we thought," said Nigel Gault, an economist at IHS Global Insight. Gault notes that data for June showed little growth in retail sales, factory output and hiring.

Gault said he expects growth of less than 3 percent in the July-September quarter. That's down from his earlier forecast of 3.4 percent. Economists at Goldman Sachs and JPMorgan Chase project third-quarter growth of only 2.5 percent. That's barely enough to keep the unemployment rate from rising.

The economy needs to expand at a 5 percent pace to make a significant dent in unemployment.

Economists cite several reasons for the disappointing growth:

— Weak consumer spending. Held back by stagnant wages and high unemployment, people simply aren't spending money. Economists forecast that consumer spending grew in the April-June period less than 1 percent, the slowest pace since the recession ended. High gas prices forced consumers to cut back on other discretionary purchases. Sales of furniture, appliances, sporting goods and electronics fell last month for the third straight month, according to the government's June report on retail sales.

— Cuts in government spending. Governments at all levels -- federal, state and local -- are short on cash and being forced to rein in spending. All told, the cutbacks reduced economic growth 1.2 percentage points in the January-March quarter, the biggest hit to the economy from reduced government spending since the early 1980s. While the impact won't be as large in the April-June period, economists expect lower government spending restrained growth.

— Dismal hiring. Employers added only 18,000 jobs in June, the second-straight month of weak hiring and much slower than the average of 215,000 jobs added each month from February to April. And even people with jobs aren't getting any raises. Adjusted for inflation, average hourly pay fell 1.5 percent in the past year, the Labor Department said earlier this month.

One wild card for Friday's report on the economy will be how much companies added to their stockpiles. If companies built up more inventory in their warehouses than economists forecast, that would mean factories produced more and the economy grew at a faster pace. But that could also mean slower growth in subsequent months, because consumers aren't spending much and it would take time for companies to reduce their stockpiles. That would slow the production of new goods.