Recovery loses speed as consumers turn cautious

WASHINGTON (AP) -- The recovery lost momentum in the spring as growth slowed to a 2.4 percent pace, its most sluggish showing in nearly a year and too weak to drive down unemployment.

Consumers spent less, companies slowed their restocking of shelves and the nation's trade deficit dragged more on the economy in the April-to-June quarter. In a separate report, the Commerce Department said the recession was deeper than previously estimated.

Together, the reports raise doubts about whether employers will hire enough and consumers will spend enough to invigorate the economy. As unemployment remains near double digits, Congress could feel pressure to pass more stimulus measures to speed the recovery. So far, Republicans and some Democrats have blocked additional spending because of their concerns about the size of the deficit.

Investors reacted to the report with disappointment. Stock futures fell in the hour before the markets opened. However, losses moderated in morning trading after the University of Michigan/Reuters consumer sentiment index for July rose slightly more than expected.

The Commerce Department report released Friday did offer some encouraging news. Businesses invested the most in 13 years on equipment and software during the second quarter. For the first time in two years, builders boosted spending on commercial projects. And home builders spent the most in 27 years, although many expect that to fade now that government homebuying tax credits have expired.

The report also showed that the economy grew at a 3.7 percent pace in the first three months of this year. That was much better than the 2.7 percent pace estimated just a month ago.

Still, the recovery has been losing power for two straight quarters. That raises concerns about whether it will fizzle out. Or worse, tip back into a "double-dip" recession.

The economy began to grow in the third quarter of last year after having suffered the worst recession since the Great Depression. And in the following quarter the economy's growth surged at a 5 percent pace, the high water mark of the rebound.

Much of the expansion was driven by the government's massive $862 billion stimulus package of tax cuts and increased spending. Also, companies helped energize growth with a burst of spending to replenish inventories that were cut down during the recession.

Now, as those forces are fading, concerns are growing as to whether the private sector can boost spending and investment enough to keep the recovery afloat.

Consumer spending, usually the lifeblood of economic activity, slowed in the second quarter. Such spending rose at an anemic 1.6 percent pace. That was down from a 1.9 percent pace in the first quarter and was the weakest showing since the end of last year.

Instead, Americans saved more. They saved 6.2 percent of their disposable income in the second quarter, the highest share in a year.

The 2.4 percent growth rate logged in the April-to-June quarter was the weakest since a 1.6 percent pace in the third quarter of last year, when a record streak of four straight losing quarters came to an end.

"The economy is growing but not enough to make most Americans happy. At this weak pace, it will take more time than many hoped for people to really feel the benefits of this upturn," said Joel Naroff, president of Naroff Economic Advisors.

In the revisions issued Friday, the government estimated that the economy shrank 2.6 percent last year -- the steepest drop since 1946. That's worse than the 2.4 percent decline originally estimated. The economy's plunge underscores why the unemployment rate surged to 10.1 percent in October, a 26-year high.

With the economy growing at a subpar speed, the current 9.5 percent unemployment rate is not expected to fall.

It takes about 3 percent growth in gross domestic product just to create enough jobs to keep pace with the population increase. Growth would have to equal 5 percent for a full year to drive the unemployment rate down by 1 percentage point. Neither the Obama administration nor the Federal Reserve expect that to happen.

Gross domestic product measures the value of all goods and services - from machinery to manicures - produced within the United States. It is the best gauge of the nation's economic health.

The weak economy leaves Democrats and Republicans on Capitol Hill vulnerable as they head into the November midterm elections. Democrats, who now control both chambers, have the most to lose. The gloomier outlook is also a liability for President Barack Obama.

However, there were some encouraging signs in terms of business spending.

Spending by businesses on equipment and software increased at a blistering 21.9 percent pace in the second quarter. Builders boosted spending on commercial projects, such as office buildings and plants, at a 5.2 percent pace. And, home builders, who have cut spending for the last two quarters, ratcheted up their outlays at a hot 27.9 percent pace, the most in nearly 27 years. Still, with the expiration of the government's homebuyer tax credit, housing activity has started to turn sluggish again.

Looking ahead, though, businesses still aren't showing signs of ramping up spending that would translate into the explosive kind of growth needed to drive down unemployment.

Uncertain about the strength of the recovery, companies are sitting on record piles of cash, loath to use the money to hire new workers and expand operations. Caterpillar Inc., Dupont Co. and Microsoft Corp. are among companies reporting strong second-quarter earnings in the past two weeks yet they aren't ready to bulk up their work forces.

"There is a high degree of uncertainty. There is a recovery under way. It is going to be choppy," said United States Steel Corp. Chairman and CEO John Surma earlier this week.

Overall economic growth was bolstered in the second quarter by strong spending by the federal government. It boosted spending at a 9.2 percent pace, the most in a year. And, state and local governments, coping with budget shortfalls, increased their spending for the first time in a year.