US economy feels pinch as cash-strapped consumers cut back their spending

Flagging US consumers tightened their belts between April and June and pushed the world's biggest economy into its weakest performance since the middle of last year, official figures showed yesterday.

The US economy grew at an annual pace of just 1.5 per cent in the second quarter, in what should be a worrying loss of momentum for President Barack Obama's re-election hopes in November.

The slowdown – from 2.2 per cent between January and March – is still better than the UK's shock, 0.7 per cent decline over the same period, but represents the most sluggish pace for the US economy since the third quarter of 2011.

The tepid growth will also do little to eat into America's 8.2 per cent unemployment rate. No sitting president has ever been re-elected with a US jobless rate of higher than 7.2 per cent.

Most economists judge the picture is unlikely to improve in the second half of this year as Europe's debt crisis lingers on and China's economy shows signs of a slowdown.

CEBR senior economist Tim Ohlenburg said: "A quick spin of the globe illustrates the problem: the US is slowing, the eurozone heading into recession, China is coming off its supercharged growth trajectory, Brazil and India are struggling – among major economies that mainly leaves Australia and Japan with hopes for doing well this year."

The biggest culprit was a slowdown in consumer spending which slowed to just 1.5 per cent – down from 2.4 per cent in the first quarter – as Americans cut back on cars, computers and other manufactured goods. Consumers account for 70 per cent of the economy.

The US also faces difficulties at the end of this year as the country approaches a "fiscal cliff" which could knock as much as 5 per cent off the economy next year. Sharp tax increases and deep spending cuts are due to kick in unless Congress can reach an agreement on the Budget.