Second-quarter GDP growth came in at 1.5%, down from 2.0% in the first quarter (which was revised up from 1.9% previously). The deceleration in growth was not a surprise. Our early-July forecast had projected 1.5% growth, and as of yesterday we had been anticipating 1.4% growth.

A broad-based slowing in consumer and business spending was responsible. Real consumer spending growth slowed from 2.4% to 1.5%. Spending on durable goods actually dropped slightly, as light-vehicle sales were lower in the second quarter than in the first. Business fixed investment spending decelerated to 5.3% growth, from 7.5%, although the picture was not uniform. Spending on structures grew only 0.9% in the second quarter, down from 12.9% growth in the first. In contrast, spending on equipment and software accelerated to 7.2% growth in the second quarter, from 5.3% in the first. While that is encouraging, the bad news is that orders for nondefense capital goods excluding aircraft—the bellwether indicator of equipment demand—turned down during the second quarter, indicating that third-quarter equipment spending growth will be much slower.

Residential fixed investment (housing and related activities) showed another quarter of solid gains (9.7%). Unsurprisingly, though, this was a much slower pace of growth than in the first quarter (20.5%), which was helped by the warm weather.

Export growth (5.3%) and import growth (6.0%) held up well, and both were stronger than in the first quarter. With imports growing faster than exports, trade overall subtracted 0.3 percentage point from GDP growth. However, the signals from export orders are weak, and suggest that export growth will slow in the third quarter.

Government spending, both federal and state and local, remained a drag on growth, although the declines were not as steep as in the first quarter.

Inventory accumulation was faster than in the first quarter, and added 0.3 percentage point to GDP growth. Although inventory-to-sales ratios are still low, they are edging up slightly, so firms will become more cautious, and inventories are likely to be a drag on third-quarter growth.

The initial second-quarter GDP estimates were accompanied by annual revisions to the national accounts stretching back to 2009. These revisions can sometimes be game-changers, radically altering perceptions of the economy's trajectory. That was the case last year, when revisions showed a much deeper recession and slower recovery than previously thought. But this year's revisions were not earth-shattering. The recession does not look as deep as it previously did, with the peak-to-trough decline in real GDP now at 4.7%, rather than 5.1% (the peak and trough quarters are the fourth quarter of 2007 and the second quarter of 2009). But just as the recession through 2009 looks shallower, so does the recovery in 2010. The calendar-year decline in GDP during 2009 is now 3.1% (previously 3.5%), but the rebound in 2010 is now only 2.4% (previously 3.0%).

The calendar-year picture for 2011 is little changed (1.8% growth, instead of 1.7%), although the quarterly pattern of growth looks more jagged. The new figures show GDP growth almost zero in the first quarter of 2011 (0.1%, previously 0.4%), but a very strong bounce in the fourth quarter (4.1%, instead of 3.0%), presumably a relief bounce after the Eurozone and debt-ceiling crises in the third quarter. But growth has slipped away in the first half of 2012, much as previously believed. The combined effect of the various ups and downs leaves the level of real GDP in the first quarter almost exactly where it was before (it is actually just 0.1% higher than previously estimated).

Given the stronger fourth quarter of 2011, the economy was carrying a bit more momentum into 2012 than previously thought. But if we look forward to second-half 2012 prospects, there's little reason for optimism. The second-half outcome is likely to be weaker than the average 2.0% growth rate that we expected in our July forecast.

The economy has little momentum, and there are plenty of risks for businesses and consumers to worry about, including the Eurozone crisis, the looming fiscal cliff, and the Midwest drought. Employment growth has decelerated, and retail sales have fallen for three months in a row. We see third-quarter growth in the 1–2% region, with risks to the downside. But barring further shocks, we do not see the economy slipping back into recession.

The outlook is worse than the Federal Reserve's June projections, and as a result we expect to see another round of quantitative easing from the Fed. But we think the Fed will wait until September to act (which would allow it to see two more monthly employment reports), rather than move at next week's meeting. We expect the quantitative easing to target mortgage-backed securities, with the aim of driving mortgage rates even lower. But with mortgage rates already around 3.5% for 30-year loans, it's hard to see even lower rates having a major positive impact, since the problem is more about the ability of borrowers to qualify for that rate.