GDP Slows to Lethargic 1.5 Percent

The nation's economic output grows yet more sluggish, with the fiscal cliff amping up worries.

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The nation's economic growth slowed last quarter to an annualized 1.5 percent, down from the first quarter's 2.0 percent, according to new numbers from the Commerce Department.

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The latest report of GDP, the nation's economic output, wasn't much of a deviation from expectations; a Bloomberg survey of economists had projected the figure at 1.4 percent. However, a slowdown is an alarming sign that the slow recovery is likely to stay that way.

According to the Department of Commerce, the slowdown mostly reflects a slowdown in personal spending and an increase in imports, as well as slowing spending on "fixed investment," like housing and business purchases of new buildings, equipment, and software. State and local government spending also contributed to the slowdown, but growth in exports and business inventory spending helped to boost growth.

While the Commerce Department lists the many factors that contribute or detract from economic growth, they have no measure for the uncertainty hanging over the U.S. economy right now.

The so-called "fiscal cliff" of expiring Bush-era and payroll tax cuts and potential massive spending cuts may already be dragging the economy back toward recession.

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Businesses are "already making contingency plans and holding back because they see it coming, and they prefer to be conservative beginning now, rather than catch up in September and October," says Adolfo Laurenti, deputy chief economist with Chicago-based Mesirow Financial.

The CBO has projected that, should lawmakers do nothing to avoid that cliff, the nation's economy could slide into recession in the first half of 2013. However, even the growing threat of that cliff could significantly hold growth back.

"It will continue to get worse and worse the closer we get to the end of the year if we do not get the sense that something will be done," says Laurenti.

That worry pervades even the highest levels of American economic policy. Testifying before the Senate Banking Committee earlier this month, Federal reserve Chairman Ben Bernanke stressed the importance of acting quickly to avoid those tax increases and spending cuts.

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"The most effective way that Congress could help to support the economy right now," he said, "would be to work to address the nation's fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery."

Slowing spending by businesses and consumers alike make for more fragility. However, one minor bright spot in the report was that less spending came with more saving; the personal saving rate, which measures saving as a percentage of disposable personal income, jumped from 3.6 percent in the first quarter to 4.0 percent in the second.

The Commerce Department also issued revisions to GDP for the last three years, suggesting that the crisis was not as deep as previously thought, but the recovery was more modest. GDP growth in 2009 was revised up from -3.5 percent to -3.1 percent, but for 2010 was revised down from 3.0 percent to 2.4 percent. 2011 showed only a slight change, from 1.7 to 1.8 percent.

Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter at @titonka or via E-mail at dkurtzleben@usnews.com.