WASHINGTON (MarketWatch) — U.S. economic growth has again slowed sharply, skidding dangerously close in the second quarter to an outright contraction in gross domestic product.

Following the releases Monday of tepid reports on retail sales and inventory accumulation, forecasters marked down their GDP expectations from 1.4% to 1.1%. It’s probable that U.S. GDP rose less than 2% for the third quarter in a row, and it’s possible that growth was less than 1% for the second quarter in the last three.

It’s not news that the global growth is sluggish, and that sluggishness is weighing on U.S. manufacturers’ export growth. And we know that the federal government is cutting back its spending.

But we thought that the household sector was holding up a little better. The surprise Monday was that U.S. consumers were more cautious as well. Retail sales rose 0.4% in June, with most of the growth coming from automobile sales. Most retailers reported weak sales for the month.

Because spending started the quarter on a weak note, it’s likely that consumer spending increased at less than a 2% annual rate in the quarter. Without stronger growth in consumer spending, businesses won’t invest as much. And investors are likely to be disappointed with flat revenue growth at their favorite companies.

Most people have been expecting a weak first half of the year, what with the tax hikes, falling government spending and anemic global growth. But the assumption has always been that the economy would pull out of its funk in the second half of the year.

China's economic rebalancing issues

It may surprise a lot of people who can only see the still-high unemployment rate, but the best thing the economy has going for it right now is relatively healthy job growth.

The strengthening labor market is putting more money into the pockets of consumers, even as higher taxes and federal sequesters suck more oxygen out of the economy. The aggregate amount of money in paychecks is increasing about twice as fast as GDP.

Since the recession began 5 ½ years ago, lack of income growth has been a big factor restraining demand. Now, it seems, incomes are finally growing.

The big question for the second half is whether job growth can continue to outperform and push the economy to grow faster, or whether the first-half growth slump will drag down the hiring rate.

With the tax hikes and sequester fading into the rearview mirror, there’s reason for optimism. But there’s no room for complacency.

— Rex Nutting