* Second-quarter GDP rises 1.5 percent, slows from Q1
* Consumer spending growth slowest in a year
* Inventories rise, point to slower third-quarter growth
* Report could raise chances of further monetary stimulus
WASHINGTON, July 27 (Reuters) - U.S. economic growth slowed
in the second quarter as consumers spent at their slowest pace
in a year, increasing pressure on the Federal Reserve to do more
to bolster the recovery.
Gross domestic product expanded at a 1.5 percent annual rate
between April and June, the weakest pace of growth since the
third quarter of 2011, the Commerce Department said on Friday.
First-quarter growth was revised up by a tenth of a percent
to a 2.0 percent pace.
Details of the report were weak, with foreign trade being a
drag and stocks of unsold goods rising. That, together with
signs that activity slowed further early in the third quarter
strengthens the argument for the Fed to offer the economy
additional stimulus at its September meeting.
"The economy has lost altitude and flying pretty close to
stall speed. Monetary policy is the only game in town and
additional easing is highly likely," said Sung Won Sohn, an
economics professor at California State University Channel
Islands in Camarillo, California.
The ailing economy could cost President Barack Obama a
second term in office when Americans vote in November. Obama's
approval rating on his handling of the economy is slipping.
An Ipsos/Thomson Reuters poll published last week showed 36
percent of registered voters believe Republican candidate Mitt
Romney has a better plan for the economy, compared to 31 percent
who had faith in Obama's policies.
In a nod to the darkening economic outlook, the White House
on Friday cut its growth estimate for this year to 2.3 percent
from 2.7 percent back in February. The growth forecast for 2013
was pared to 2.7 percent from 3.0 percent.
The economy's expansion following the 2007-09 recession is
the slowest since the 1980-81 period and the recession itself
was the deepest in the post-war period.
FED MAY KEEP POWDER DRY
No major policy announcement is expected at the Fed's
two-day meeting next week, but many economists now say the
central bank could launch a third round of bond purchases, also
known as quantitative easing, when policymakers gather on Sept.
12-13.
However, there is a chance the Fed could push further into
the future its conditional pledge to keep rates near zero
through late 2014, economists said.
The U.S. central bank has already injected $2.3 trillion
into the economy through asset purchases and slashed overnight
interest rates to near zero.
But not all economists believe the Fed will pump more money
into the economy in September, arguing that the slowdown in
growth was not a sufficient condition on its own. They said the
Fed would want to save its limited arsenal for a real crisis.
"The Fed will pull the trigger on QE3 if the sense is we are
getting into trouble, but if we are just weak and somewhat
limping forward, they will prefer to stay pat," said Adolfo
Laurenti, a senior economist at Mesirow Financial in Chicago.
"They do not want to use whatever ammunition they have left
too soon, they want to keep some just because things might get
even worse later on."
The economy has been hit by worries of deep government
spending cuts and higher taxes scheduled to kick in at the start
of 2013, as well as troubles from the debt crisis in Europe.
The biggest factor weighing on the recovery is fear that
politicians in Washington will be unable to avoid the so-called
fiscal cliff at the turn of the year, economists said.
Third-quarter growth is forecast at a rate between 1 and 1.5
percent.
E xpectations of further monetary stimulus fueled a rally on
Wall Street, with the Dow Jones industrial average
cl osing a bove 13,000 f o r the fir st time since May 7.
The Standard & Poor's 500 index touched its highest
level in nearly three months. T reasury debt prices fell as the
GDP report was in line with economists' expectations. The dolla r
ros e against the yen.
CONSUMERS HUNKER DOWN
Much of the slowdown in growth in the second quarter was
caused by a softening in consumer spending as Americans eased
off on automobile purchases due to tepid job and income growth.
Consumer spending, which makes up about 70 percent of U.S.
economic activity, increased at a 1.5 percent rate, a step down
from the 2.4 percent pace logged in the previous three months.
Consumer spending was the weakest in a year. Auto buoyed
consumption in the prior period.
Ford Motor Co this week said that because of cooling
demand it now expected industry wide U.S. auto sales to be at
the lower end of its forecast of 14.5 million to 15 million
vehicles, including medium- and heavy-trucks.
The outlook for spending is not promising. Worries over jobs
and income pushed consumer sentiment to its lowest level in a
year in July, a second report showed.
The Thomson Reuters/University of Michigan's consumer
sentiment index fell to 72.3 this month from 73.2 in June.
Employment growth averaged 75,000 jobs a month in the second
quarter, compared to an average monthly increase of 226,000 in
the first three months of the year.
The unemployment rate was 8.2 percent in June. The economy
needs to grow at a rate of between 2 percent and 2.5 percent
just to keep the unemployment rate stable.
Wary of the economic outlook, Americans pocketed money from
falling gasoline prices in the second quarter, pushing the
saving rate up its the highest level in a year.
INVENTORY LIQUIDATION LOOMING
While business inventories contributed nearly a third of a
percentage point to GDP growth, slowing domestic demand means
businesses could find themselves with unwanted stock. That would
be a drag on third-quarter growth.
Excluding inventories, GDP rose at a 1.2 percent rate, the
weakest pace since the first quarter of 2011. In the first
quarter, the comparable figure was 2.4 percent.
"The inventory build was larger than we thought, I think
that's going to come at the expense of growth this quarter,"
said Ryan Sweet, a senior economist at Moody's Analytics in West
Chester Pennsylvania.
"You take in the drought, and I think that's going to hurt
farm inventories. It's getting more and more difficult to
identify a spark for the economy."
Export growth pushed higher, despite slowing demand in
Europe and China, but it was offset by a strong rise in imports.
Trade subtracted almost a third of a percentage point from GDP
growth.
Government spending contracted for an eighth straight
quarter, but the pace of decline slowed. Defense spending fell
marginally after two quarters of hefty declines.
Weak demand muzzled inflation pressures during the quarter.
A price index for personal spending rose at a 0.7 percent rate,
the lowest pace since the second quarter of 2010, after rising
2.5 percent in the first quarter.
A core measure that strips out food and energy costs
advanced at a 1.8 percent rate, moderating from 2.2 percent in
the prior quarter.