The US economy is looking to a torpid second half this year after data showed US consumers have zipped up their wallets and the government moved to cut more spending, economists said Tuesday.

Analysts who only weeks ago predicted a bright rebound in the July-December period are now saying the first half's malaise could continue, with few prospects of a reduction in joblessness or rise in paychecks that would boost spending by the all-important American consumer.

While economists dismiss the prospect of another outright contraction, few saw any bright signs ahead after the Commerce Department released data showing that in June, consumer spending shrank for the first time in nearly two years -- since the height of the Great Recession.

That came on the heels of other data showing a stalled economy: still-high numbers of people applying for unemployment insurance, numerous layoff announcements and a much-watched ISM index that showed virtually no growth in the manufacturing side of the economy in July.

Even auto sales data for July, though buoyant for the big three US carmakers, showed a bare 0.9 percent rise in sales from a year earlier.

"The pace of the recovery may be slower than what we previously expected," said Don Johnson, vice president for sales at GM.

On their eighth straight day of losses, stockmarkets plunged more than two percent Tuesday amid growth worries, while yields on US bonds hit lows for the year -- another indication of fears of weakness.

And the latest losses came despite President Barack Obama signing the last-minute bill to raise the debt ceiling and implement a deficit-cutting plan that removed the specter of an imminent US default on its debt.

And though economists said the planned $2.4 trillion in cuts over the next 10 years would not hit economic growth very much, the consumer spending data made much more of an impact.

"In the space of a week, investors' opinions have completely turned around," said Gregori Volokhine of Meeschaert Capital Markets.

"Now, we start to have people talking about a recession in the second half of the year."

The government shocked the markets last week with its estimates for first-half growth that showed unexpected stagnation: gross domestic product was at a dead-pace 0.4 percent in the first quarter and 1.3 percent in the second -- far below what was expected.

Underlying that was extremely weak consumer spending in the April-June period.

Economists are now lowering their estimates for the second half sharply, from previous rates that rose above four percent.

Deutsche Bank foresees a 2.5 percent pace in the third quarter, picking up to 3.0 percent in the fourth. For the entire year, growth will be a miserly 1.9 percent, it predicted.

Ian Shepherdson of High Frequency Economics forecast a 1-2 percent pace in the third quarter, picking up to 3-4 percent in the fourth.

But, he warned, if indicators like the ISM manufacturing number remain stuck at the no-growth level of July, "then it might be reasonable to expect the economy to shrink outright in the third quarter."

Jeffrey Rosen, an economist at Briefing.com, said the more upbeat Federal Reserve appears to see the first-half slowdown as the result of temporary factors -- extreme weather, the oil and food price surge, as well as Japan's tsunami, earthquake and nuclear disaster.

"As these conditions pass, the Fed expects the economy to shake the summer doldrums and economic growth should return to potential," Rosen said.

But he said the economy is more likely facing deep structural problems "that could have long-lasting effects."

"If this is the case, the economic weakness will most likely persist through the remainder of the year," he added.

Ratings agency Moody's echoed that concern. While confirming its AAA rating for the United States, it added a negative outlook, namely citing the weakening economy.

"Recent downward revisions of economic growth rates and the very low growth rate recorded in the first half of 2011 call into question the strength of potential growth in the coming year or two," Moody's said.

Tweet

Related Links The Economy