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Kimberly Amadeo

Second Quarter GDP Growth at Sluggish 1.5%

By July 27, 2012

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The BEA's initial estimate for second quarter (April-June) economic growth was 1.5%, down from the first quarter's growth rate of 2%.   The government's estimate of the growth in Gross Domestic Product (GDP) is falling short of the 2-3% range that economists consider healthy. It's less than half the 4.1% economic growth rate in the fourth quarter (October -December) 2011. Note: In July, the BEA revised all GDP figures since 2009. To compare these revisions to the original, see GDP Current Statistics.

Why is  growth slowing down?  Households cut back on large purchases, such as automobiles and furniture as well as small purchases such as restaurants and clothing.  Although they bought more gasoline, thanks to lower gas prices, it wasn't enough to make up for cutbacks in other areas. Personal consumption only contributed 1.01%to economy in Q2, compared to a 1.74% contribution in Q1.

Cutbacks in government spending continued to subtract from GDP, although not as much as in the first quarter.  Federal and local government spending lessened economic growth by .28%, compared to a .6% drag in Q1.

Imports outweighed export a bit, probably thanks to record-low euro levels. A low euro makes imports from the eurozone relatively cheaper. Imports have a negative impact on the GDP report, since they siphons off demand from the domestic economy. In the second quarter, higher imports subtracted .31% from economic growth.  This was unlike the first quarter, where exports outweighed imports. (Source: BEA, GDP Advance Estimate, July 27, 2012)

What It Means to You

Wall Street analysts expect that this economic growth may pick up a bit in Q3. That's because slower auto sales in Q2 could be because sales were higher than normal in Q1 thanks to a warmer winter, subtracting demand from Q2. Sales  should normalize in Q3. Consumers, like businesses, are cautious about spending until after the Presidential election and a resolution of the fiscal cliff. Expect an uptick for those areas by Q1 2013.

However, don't expect any help from government spending. The Federal government is prevented by the large debt to GDP ratio from any big stimulus spending. Even worse, many cities across the country are going bankrupt. States are cutting back on aid to the cities, leaving the municipalities no choice but to renege on prior agreements. This includes debt as well as pensions.  If you expect either a state or city-funded pension, check your local government to see how well it is funded, and adjust your retirement plans accordingly.

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