Economic growth likely slowed in the second quarter as a capital investment drive by businesses was sated by imports and consumer spending tapered off, a government report is expected to show on Friday.

Gross domestic product expanded at a 2.5 percent annual rate compared to a 2.7 percent pace in the first quarter, according to a Reuters survey.

The Commerce Department is due to release its advance report on GDP, which measures total goods and services output within U.S. borders, at 08:30 a.m. (1230 GMT).

We expect the economy to have shifted into lower gear in the second quarter, primarily due to a widening in the trade deficit and also weaker consumer spending, said Ryan Sweet, a senior economist at Moody's in West Chester, Pennsylvania.

Although the slowdown in the recovery from the worst downturn since the 1930s was flagged by a stream of weak economic data in the past couple of months, a softer report could revive fears of a double-dip recession among investors.

The sluggish economy and a 9.5 percent unemployment rate are eroding President Barack Obama's popularity and dimming Democrats' prospects in November's mid-term elections.

A Reuters-Ipsos poll this week showed only a 34 percent approval of Obama's handling of the economy and jobs compared to 46 percent who deemed it unsatisfactory.

This is a sharp decline from early 2009, shortly after he took office, when more than half of those surveyed approved of Obama's handling of the worst financial crisis in decades.

Analysts do not believe the economy will slide back into recession. They argue an import surge that will subtract from GDP is probably related to increased spending on equipment by businesses, which suggests strength in underlying demand.

We are forecasting that net trade will subtract more than a percentage point from GDP, said Zach Pandl, an economist at Nomura Securities International in New York.

Imports are a bit peculiar because rising imports suggest strong demand in the economy, increased optimism. But also it's a leakage from the U.S. The production doesn't go to the U.S. income.

Apart from capital equipment, the rise in imports has also extended to consumer products.


With hiring by private businesses slowing in the second quarter, consumer spending likely cooled somewhat from the 3.0 percent rate recorded in the first three months of the year, contributing to the slower economic growth pace.

Consumer spending normally accounts for about 70 percent of U.S. economic activity. Only a small contribution to growth is expected from the change in inventories, as the boost from the restocking of warehouses starts to wane.

The rebuilding of inventories from record low levels has been a major force in the recovery which started in the second half of 2009. Analysts will be watching to see if final demand recovered after braking sharply in the first quarter.

The economy in the second half is going to lean more heavily on consumer spending because the biggest support from fiscal stimulus and inventories is now ending, said Moody's's Sweet.

Growth excluding inventories is expected to have increased at a 1.8 percent rate, accelerating from 0.8 percent in the first quarter.

While businesses scaled backed on hiring, they are expected to have stepped up spending on capital equipment and projects. An increase in spending on equipment and software will be viewed as a sign of confidence in the fragile recovery.

Business investment was cut too much during the recession, said Jim O'Sullivan, chief economist at MF Global in New York. Companies have been piling up cash and have huge potential to increase capital spending.

Many economists look for a decline in spending on nonresidential structures, although some say a rise in investment in oil and gas drilling structures should temper the blow if not lead to an increase.

JPMorgan economist Michael Feroli said it was unlikely the increased investment was related to the BP oil spill in the Gulf of Mexico.

Support to growth in the second quarter is also seen coming from residential construction, which is expected to have rebounded reflecting a spurt in building activity spurred by a popular homebuyer tax credit that has since expired.

(Editing by Todd Eastham)