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Unemployment could stay high as US economy slows

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MARTIN CRUTSINGER | July 27, 2012 05:56 PM EST | AP

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WASHINGTON — High unemployment isn't going away – not as long as the economy grows as slowly as it did in the April-June quarter.

Weak consumer spending held growth to an annual rate of just 1.5 percent, even less than the 2 percent rate in the first quarter. And few expect the economy to accelerate in the second half of the year as Europe's financial woes and a U.S. budget crisis restrain businesses and consumers.

The growth estimate Friday from the government suggested that the U.S. economy could be at risk of stalling three years after the recession ended. Economists generally say even 2 percent annual growth would add only about 90,000 jobs a month. That's too few to keep up with population growth and drive down the unemployment rate, which is stuck at 8.2 percent.

The figures came in the Commerce Department's quarterly report on gross domestic product. GDP measures the country's total output of goods and services, from the purchase of a cup of coffee to the sale of fighter jets.

"The main takeaway from today's report, the specifics aside, is that the U.S. economy is barely growing," said Dan Greenhaus, chief economic strategist at BTIG LLC. "It's no wonder the unemployment rate cannot move lower."

Sal Guatieri, senior economist at BMO Capital Markets, expects the unemployment rate to end this year – and next year – at 8.3 percent. He said he foresees no decline in unemployment because of how tepid he thinks economic growth will remain: 2.2 percent for all of 2012 and 2 percent for 2013.

Stocks rose as investors shrugged off the sluggish U.S growth and focused instead on pledges from European leaders to preserve the union of the 17 countries that use the euro. The Dow Jones industrial average closed up more than 187 points. Broader indexes also jumped.

The lackluster economy is raising pressure on President Barack Obama in his re-election fight with Mitt Romney, the presumptive Republican presidential nominee. But few think the Fed, the White House or Congress can or will do anything soon that might rejuvenate the economy quickly. Many lawmakers, for example, refuse to increase federal spending in light of historically large budget deficits.

No president since Franklin D. Roosevelt, in the depths of the Great Depression, has been re-elected when the unemployment rate exceeded 8 percent. Presidents Jimmy Carter and George H.W. Bush were ousted when unemployment was well below 8 percent.

Polls show that management of the economy is the only issue on which those surveyed express more confidence in Romney, with his business background, than Obama.

Glenn Hubbard, economic adviser for Romney, said Friday's report largely matched economists' expectations.

"But those expectations themselves and the report itself were actually quite disappointing," Hubbard said. "At that pattern, the economy simply will never return to full employment."

Alan Krueger, chairman of the White House Council of Economic Advisers, noted that the report showed the economy grew for the 12th straight quarter. Still, Congress could strengthen growth and job creation by adopting Obama's plan to extend expiring tax cuts for all except the wealthiest Americans, Krueger said.

Republicans want the tax cuts extended for all Americans.

The 1.5 percent growth rate in the second quarter was the weakest since GDP grew at a 1.3 percent rate in the July-September quarter last year. And it shows the recovery is gaining no momentum.

After shrinking 3.1 percent in 2009 in the midst of the recession, the economy grew 2.4 percent in 2010. Last year, growth slowed to 1.8 percent – roughly the same meager pace at which the economy expanded in the first half of this year.

Even in normal times, such growth rates are subpar. They're especially weak for a recovery that follows a deep recession, when growth is typically much stronger than average.

Annual economic growth of 2.5 percent to 3 percent is needed to create enough jobs just to keep up with an expanding workforce. Healthier growth of 4 percent or more is needed to reduce the unemployment rate significantly.

The government makes three estimates of GDP for each quarter. Each revision is based on more complete economic data.

The sluggish growth rate could make the Federal Reserve more likely to announce some new step after it meets next week. But Paul Dales, senior U.S. economist at Capital Economics, doubts the Fed will act at the July 31-Aug. 1 meeting.

Many economists instead think the Fed will launch another round of bond buying at its September policy meeting. The aim would be to drive long-term interest rates lower and encourage more borrowing and spending.

In the second quarter, GDP in current dollars rose at an annual rate of $117.6 billion to $15.6 trillion.

Growth was weaker mostly because consumer spending slowed to a growth rate of just 1.5 percent. That was down from 2.4 percent in the first quarter.

Americans bought fewer autos, computers and other long-lasting manufactured goods. But money spent on services, which represents about two-thirds of spending, rose in the April-June quarter.

As they spent less, Americans also saved more. The savings rate reached 4 percent, up from 3.6 percent in the first quarter.

The savings rate reached a low of 1.5 percent in 2005, a year when soaring home prices made consumers feel less need to save. The rate climbed to 5.4 percent in 2008 as the financial crisis and recession squeezed Americans.

Nigel Gault, chief U.S. economist at IHS Global Insight, said consumer spending will likely remain subdued in the second half of the year. He thinks it will grow at or below a 2 percent annual rate.

Gas prices have stopped falling and have even started to rise in recent weeks. And this summer's severe drought is expected to push food prices up toward the end of the year.

"There is really no reason to see us pulling out of this malaise any time soon," Gault said. "I am not calling for a recession, but I am calling for weak growth."

The U.S. economy has never been so sluggish this long into a recovery. The Great Recession officially ended in June 2009.

Until a few weeks ago, many economists had been predicting that growth would accelerate in the final six months of the year. They pointed to gains in manufacturing, home and auto sales and lower gas prices.

But threats to the U.S. economy have left consumers too anxious to spend freely. Jobs are tight. Pay isn't keeping up with inflation. Retail sales fell in June for a third straight month. Manufacturing has weakened in most areas of the country.

Fear is also growing that the economy will fall off a "fiscal cliff" at year's end. That's when tax increases and deep spending cuts will take effect unless Congress reaches a budget agreement.

All that is making companies reluctant to expand and hire much.

The Commerce Department also revised its growth estimates for the past three years. Those revisions showed that the economy contracted 3.1 percent in 2009, slightly less than the 3.5 percent previously reported. Growth in 2010 was put at 2.4 percent, down from 3 percent, with growth in 2011 at 1.8 percent instead of 1.7 percent.

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Associated Press Staff Writers Christopher S. Rugaber, Paul Wiseman and Tom Raum contributed to this report.