Goldman Sachs cuts second-quarter growth estimates

WASHINGTON (Reuters) - Goldman Sachs has cut its forecast for U.S. second-quarter growth to 1.5 percent from 2 percent, citing weak consumer spending.

The downgrade follows last week's raft of weak reports on retail sales, manufacturing and consumer sentiment, which have raised concerns that some of the factors impeding growth are no longer of a temporary nature, as previously thought.

A combination of bad weather and high commodity prices slowed economic activity in the first three months of 2011. But growth in the second quarter was also dealt a blow by supply chain disruptions from Japan following the March earthquake.

"Some of this weakness is undoubtedly related to the disruptions to the supply chain -- specifically in the auto sector -- following the east Japan earthquake," said Goldman Sachs Chief Economist Jan Hatzius in a weekly note to clients issued late on Friday.

"But the slowdown of recent months goes well beyond what can be explained with these temporary effects."

The economy grew at a 1.9 percent pace in the first quarter, slowing sharply from a 3.1 percent rate in the final three months of 2010. The government will release its first estimate for second-quarter GDP on July 29.

Goldman Sachs also slashed its third-quarter growth forecast to 2.5 percent 3.25 percent.

"One key question in coming months is whether final demand recovers to the 2 percent to 2-1/2 percent pace that is probably necessary to keep GDP growth near trend and prevent the unemployment rate from rising more noticeably," Hatzius said.

"We have no hard information about Q3 in this regard yet, but Friday's preliminary consumer sentiment index for July from the University of Michigan was highly discouraging."

The Thomson Reuters/University of Michigan's index of consumer sentiment fell to 63.8, the lowest since March 2009.

Other Wall Street firms, including Bank of America Merrill Lynch and BNP Paribas, have also lowered their estimates for second-quarter gross domestic product growth. Bank of America Merrill Lynch now expects second-quarter GDP to increase at a 1.5 percent annual rate, rather than 2 percent.

Economists at BNP Paribas trimmed their GDP estimate for the April-June quarter to a 1.0 percent rate from 1.5 percent.

Retail sales rose only 0.1 percent in June, with the so-called core measure in the calculation also edging up 0.1 percent. In addition, May's rise in the core measure was revised down to show a smaller 0.1 percent gain.

"This points to a paltry 0.5 percent in consumption this quarter. The double whammy of supply disruptions and the oil price shock has hit consumers very hard," said economists at Bank of America Merrill Lynch.

(Reporting by Lucia Mutikani; Editing by Dan Grebler)