By Josh Newell

WASHINGTON (MNI) – U.S. economic growth in the second quarter is
expected to have weakened further, pulled down by weak consumer spending
and the continued decline in government spending.

According to a survey of economists by MNI, the first estimate to
Q2 GDP is expected to show 1.4% growth, weaker than the 1.9% increase in
the first quarter. The GDP price index, meanwhile, is expected to rise
1.5% year over year, below the 2% gains seen in Q1.

Tepid growth in consumption is expected to be the primary factor
for the slower growth, says Wells Fargo Senior Economist Sam Bullard.

In a phone interview with MNI, he said, “the slowdown is largely
due to slower pace of real consumer spending. Lot of that has to do with
the low job growth as well as concerns in general about the economic
outlook itself.”

“Consumers are very cautious; you look at the consumer confidence
numbers, the expectations component has really fallen off,” Bullard
said, citing the looming fiscal cliff, the crisis in Europe, and slowing
growth in China all as factors that appear to be spooking both consumers
and businesses.

Mike Englund, chief economist at Action Economics also believes
consumer spending has pulled down the headline GDP number.

Taking a more technical approach on consumption, he told MNI, “The
2.5 (percent) number in the first quarter was unsustainably strong, so
we expect somewhat of a reversal there.”

He pointed to the declining retail sales numbers as further proof
that overall consumption will be weak.

Retail sales have fallen by 1.2% in Q2 and are down each of the
last three months, on a seasonally adjusted basis, according to U.S.
Census Bureau.

The other components of GDP are expected to be similar to the Q1
data.

Gross private domestic investment, which grew by 6.5% in Q1, should
rise at a comparable pace, Wells’ Bullard said, as the housing sector is
finally showing signs of strength.

“Residential construction should post its third consecutive
double-digit gain, but it’s just not as big of a component as it once
was,” he said.

Private residential construction spending was up strongly in May
and April, rising 0.9% and 0.6% respectively.

Likewise, government spending is not expected to differ, continuing
its decline, though its sub-components may be shifting.

“There’s been a handoff,” Bullard said, adding, “It was state and
local spending bringing spending down, now its federal spending that’s
the main drag.”

One other aspect to look for is the annual revisions, which will be
released alongside the Q2 data.

Jim O’Sullivan, chief economist at High Frequency Economics, told
MNI, “If anything the revisions will be more positive than negative. It
doesn’t really effect the percent change in Q2, but it is something to
watch.”

“The Q1 GDI numbers showed more strength,” so there is a chance for
upward revisions.

Furthermore, any large swings in GDP growth over the last year will
be watched very closely by the Federal Reserve.

While the Fed will not have the July Employment report when the
Federal Open Market Committee meets next week, they will have this GDP
data.

According to O’Sullivan, “If there are big annual revisions, it
will certainly be a large factor in any decisions they make, but the
odds are, if any action comes, it will be in the September meeting.”

For the year, the Federal Reserve’s FOMC forecasts GDP to grow
between 1.9% and 2.4%, according to their Summary of Economic
Projections released June 20.

The advance estimate of Q2 GDP will be released Friday at 8:30 a.m.
ET by the Department of Commerce.

–Josh Newell is a Washington reporter for Need to Know News

** MNI Washington Bureau: 202-371-2121 **

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