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As economy falters, Washington fails to act

Shannon Stapleton / Reuters

The economy's growth slowed in the second quarter, government data showed, as consumers, worried about jobs and wages, held back.

The economy is stumbling and there is little evidence that leaders in Washington are willing to act to get it moving smoothly again.

Fresh data confirmed Friday that the growth of gross domestic product slowed sharply in the past nine months. The Commerce Department’s initial estimate pegged second-quarter growth at a 1.5 percent annual rate, the weakest showing since the third quarter of last year.

The slowdown was brought into sharper relief following the government's revision Friday to estimates for prior quarters. First-quarter growth was bumped up by a tenth percentage point to 2.0 percent and output for the fourth quarter was raised to a 4.1 percent rate from 3.0 percent.

The report prompted the White House to cut its growth forecast for 2012 and 2013. In its semi-annual budget review, the White House said it now expects gross domestic product to rise 2.3 percent this year and 2.7 percent again next year – down from the 2.7 percent and 3.0 percent growth projections it made in February.

In June, the Federal Reserve lowered its prediction for growth in 2012 to 2.4 percent, a half percentage point weaker than its previous forecast in April.

The latest data show the biggest drag on growth is coming from consumer spending, which accounts for about 70 percent of economic activity. After a spending perked up last year , driven by sales of cars and other long-lasting goods, spending grew by just  1.5 percent rate, down from the 2.4 percent pace in the last quarter of 2011. That was the weakest showing in a year. 

A separate report Friday showed consumer sentiment tanked in July, falling to its lowest level of the year so far.

Consumers have reason to hunker down, following years of stagnant wages. Now, with the jobless rate stuck at painfully high levels, there is little news from Washington to boost confidence. As the economy continues to sputter, the Federal Reserve remains on the sidelines and Congress and the White House are stubbornly deadlocked over proposals to boost growth.


Hanging over all of this is the election in November. The economy's poor showing throws a hurdle in front of President Barack Obama's campaign to keep his job. His Republican rival Mitt Romney, a former businessman turned politician, has made his financial acumen a central theme of his campaign.

The poor showing in the second quarter has raised hopes that the Fed will step in with another round of asset purchases known as quantitative easing. But most economists feel if the Fed acts at all, it won't be at its regularly scheduled meeting next week.

"This (economic data) 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.

That action doesn’t appear likely in the near term, especially on the fiscal front.

In the latest act in the ongoing congressional dog and pony show on the budget, House Republicans agreed to a vote next week on a Senate-approved measure that would extend Bush-era tax cuts for households earning less than $250,000.

"If our Democrat colleagues want to offer the president's plan or the Senate Democrats' plan, we're more than happy to give them a vote," House Speaker John Boehner said Thursday.

But the Democratic bill almost certainly will fail in the Republican-controlled House, serving only to confirm that both sides are deeply deadlocked over the looming year-end tax increases and spending cuts put in place when Congress deadlocked a year ago over raising the government's legal borrowing limit.

Just as that standoff lasted until the nation was on the verge of a debt default, both sides are apparently committed to driving the government to the edge of a ruinous “fiscal cliff” before acting. In the closing days of its current session, Congress will have to resolve the issue of expiring tax cuts and “automatic” spending cuts that most economists believe would throw the U.S. economy into recession in a matter of months.

Spending cuts alone would result  in an estimated 2 million lost jobs next year even as the pace of hiring is already too slow to keep up with population growth.

With Congress and the White House deadlocked in partisan paralysis, the Fed is the economy’s last, best hope. With growth falling, speculation is rising over whether -- and when -- the central bank will begin pumping more cash into the financial system to spur more borrowing and spending by businesses and consumers.

'The Fed's concern and mandate is employment,” said Joseph Trevisani, chief market strategist at Worldwide Markets. “Annualized GDP growth at 1.5 percent cannot begin to mend the unemployment picture. Mr. Bernanke and company have all the rationale they need to open the liquidity spigot.”

But Fed watchers say it’s unlikely that policy makers will announce any new moves to prod growth at next week’s regularly scheduled, two-day meeting. One reason is that the latest data seem to bolster hopes that the economy may still dodge an outright recession. Friday’s GDP revisions, which included growth rates all the way back to 2009, tend to bolster that view.

The new figures show that the 2007 recession was not was deep as originally reported and that the recovery was not as strong.   

Based on a review of additional data, including IRS tax returns, the government now believes gross domestic product grew by just 2.5 percent in the 12 months after the recession ended in June 2009, not the 3.3 percent rebound previously reported.

That means that since the recession ended, the economy has been growing at an average pace of 2.2 percent. In that light, the latest reading of 1.5 percent growth represents a somewhat milder slowdown from the longer-term trend.  

Still, any reading of less than a 3 percent growth rate will be painful, because anything less is too slow to bring down the unemployment rate. The economy needs to grow at a 2.0 to 2.5 percent pace just to keep the unemployment rate stable.  Most Fed watchers believe that if sluggish growth persists, or worsens, the central bank likely will fire up its money pumps by the end of the year.

It remains to be seen, though, whether those moves will have much impact.

“Today’s (GDP) report may be enough to tip the balance of probability towards further monetary accommodation before the end of the year,” said Chris Jones, and economist at TD Economics. “But will it give the real economy the boost it needs?  Probably not.”

Fed Chairman Ben Bernanke recently conceded that the Fed's powers to revive growth are limited without help from Congress and the White House, which seems unlikely in an election year.

CNBC's Rick Santelli breaks down the latest economic data on the nation's gross domestic product, with Joel Naroff, Naroff Economic Advisors president.