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GDP Data Shows Consumers Culling Spending

NEW YORK ( TheStreet) -- A slowdown in consumer spending was among the more troubling aspects of Friday's disappointing read on second quarter GDP growth.

According to the Commerce Department, second-quarter GDP grew 1.3%, falling short of the 1.6% consensus estimate and the 2.1% reading expected by

Coupled with first quarter GDP growth of 0.4%, the latest numbers confirm economists' belief that the economic recovery slowed significantly in the first half of the year. The government had originally estimated that first quarter GDP grew at 1.9%, but slashed that estimate to 0.4% on new inflation data.

The second quarter increase in real GDP was due to gains in exports, federal government spending, and private investments. A drop in personal consumption, however, proved a serious drag on the overall number.

Growth in personal consumption, adjusted for inflation, tapered off to a meager 0.1% in the second quarter from 2.1% in the first quarter. That puts second quarter consumer spending at a two-year low and it's likely to make the Federal Reserve a bit nervous.

The private sector, as opposed to the government, is important in determining how the economic recovery will ultimately shape up, according to Drew Matus, an economist at UBS. If Americans aren't spending as much, then they're likely still worried about jobs, inflation and the overall economic picture.

"The supply story is ultimately going to get driven by the demand story and right now, demand does not look good," says Michael Feroli, economist at JPMorgan. "Consumer spending could indicate a weaker growth trajectory heading into the third quarter."

With the unemployment rate stuck at 9.2%, the chance that private spending will pick up seems low. Furthermore, the inflation rate, excluding changes in food and energy prices, ticked up 2.1% in the second quarter.

Yesterday's jobless claims gave investor's a glimmer of hope, as the number of Americans filing for unemployment benefits ticked below 400,000 to 398,000 after wavering above the key threshold for months. If initial claims stay low, then the jobs market might be improving, a positive for consumer spending. However, economists note that claims can fluctuate significantly from week to week.

Claims numbers in July tend to be especially volatile, notes Feroli at JPMorgan. "The jobs backdrop is not good."

With a recovery in jobs still unclear, it's too early to tell how long private spending will stay weak for. Feroli says he thinks the latest GDP report still tilts the margin for the Federal Reserve to enact monetary easing rather than tightening.

In the meantime, consumer spending estimates will likely keep economists on edge.

-- Written by Chao Deng in New York.

>To contact the writer of this article, click here: Chao Deng.

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