Consumers all but shut their wallets in the second quarter, causing the U.S. economy to grow at a tepid pace.

To make matters worse, growth in the first quarter was much slower than initially thought, according to new government figures released Friday.

"It's quite worrisome as the economy remains at stall speed in the second quarter," said Sal Guatieri, senior economist with BMO Capital Markets. "If that continues, then it would raise the risks of a double dip."

Gross domestic product, the broadest measure of the nation's economic health, rose at an annual rate of 1.3% in the second quarter, the Commerce Department said.

While that's an increase from the revised 0.4% growth rate in the first three months of the year, it is hardly good news. The government originally reported that the economy grew at a 1.9% annualized rate in the first quarter.

The growth in the second quarter was also below the 1.8% increase expected by economists surveyed by CNNMoney.

Dubbed a "soft patch" by economists and even Federal Reserve Chairman Ben Bernanke, the economy's sluggishness was due to a variety of factors that weighed on consumers and businesses.

Higher gas prices for one, hit Americans hard when they peaked at a national average of $3.98 a gallon in May.

Top 10 consumer complaints

Overall, consumer spending, which accounts for roughly 70% of gross domestic product, picked up only 0.1% in the second quarter -- marking a significant slowdown from growth of 2.1% in the first three months of the year.

"The major disappointment in the report was the weakness in consumer spending, and it wasn't just fewer automobiles being sold due to Japan's earthquake. There was broad-based softness in consumer spending." Guatieri said.

It marked the slowest growth in consumer spending since the fourth quarter of 2009.

Looking back further, it also now appears that American consumers had less disposable income than originally thought from 2007 through 2010, whereas corporate profits were revised significantly higher for 2009 and 2010.

The government revised the GDP data back to 2003 and also found the recession was worse than originally thought.

Overall, the theme of the U.S. recovery continues to be one driven by companies holding cash on the sidelines and building up their infrastructure, rather than a recovery driven by consumers.

Americans on Main Street continue to be held back by slow job growth and the housing slump, even as major companies report strong profits and have mostly solid balance sheets.

Where the jobs are

According to the latest GDP report, investment in commercial real estate surged 8.1% in the

second quarter, and business spending on equipment and software rose 5.7%.

Meanwhile, exports rose 6%. The U.S. continues to import far more goods and services than it exports to foreign countries, but because imports grew at a slower rate of 1.3%, that also contributed positively to GDP.

The aftermath of Japan's earthquake and tsunami may have been one of the major reasons import growth slowed, as the U.S. bought fewer auto parts from the country.

Friday's GDP report also sparked cries from economists for lawmakers to act quickly in raising the debt ceiling and agree to a deal to cut the national deficit over the long term.

"We don't expect a recession, but if policymakers drag their feet -- which they are doing -- it will be a little more likely," said Paul Dales, senior U.S. Economist for Capital Economics.

Guatieri said: "If the government does not raise the debt ceiling and is forced to cut back spending and Social Security checks, that could undermine consumer spending even further."

That's the $14.3 trillion question as each day ticks closer to next week's debt ceiling deadline and Congress shows no sign of brokering a deal.

If lawmakers fail to raise the ceiling by Tuesday, the Treasury Department has said it will no longer be able to guarantee that it can pay all the country's bills in full and on time.

That's because Treasury will not be taking in enough revenue to cover all the bills coming due in August. And without a debt ceiling increase, it will be prohibited from borrowing new money in the bond market to make up the difference.

So, something will have to give.

The consensus thinking has been that Treasury will prioritize who to pay first and who to put off. And at the top of the list of who gets paid will be investors owed interest on U.S. debt. If the investors aren't paid, that would constitute a default, which would have a host of negative consequences for the country.

Of course, it's possible Treasury may decide it doesn't actually have the authority to prioritize and will instead pay interest owed to bond investors but pay other bills as they come due -- first come, first served, said former Treasury official Jay Powell, who coauthored a Bipartisan Policy Center report on the consequences of not raising the debt ceiling.

Assuming, however, that Treasury believes it has the authority to prioritize, it's not clear yet who will be paid first alongside investors. The Treasury has said it will provide more information as Tuesday approaches, and Republican Sen. Orrin Hatch has requested that the department turn over its plan by 5 p.m. on Thursday.

The plan, however, isn't likely to make anyone feel better.

Will I get my Social Security check?

That's because everyone to whom money is owed besides bond investors have either qualified for federal benefits, provided goods or services to the government, are serving in the military or otherwise work for Uncle Sam. Money will also be due to agencies to which Congress has legally appropriated money to run federal programs.

On deck to be paid every month: retirees, veterans, business owners, federal workers, active-duty soldiers, Medicare physicians and government agencies that need money to keep the lights on, to name just a few.

"While at midnight on August 2nd we don't all turn into pumpkins," White House spokesman Jay Carney said in a press briefing, he described the process of picking who to pay and who to put off as a "Sophie's choice."

How the math might work: The Bipartisan Policy Center estimates that Treasury will be short by about $134 billion for the month of August.

That cash deficit will build steadily throughout the month.

So, on Aug. 3, for instance, the center estimates that Treasury will take in $12 billion in revenue and have to pay out $32 billion, creating a $20 billion cash deficit. Among the biggest bills due that day: $23 billion for Social Security payments, $2.2 billion for Medicare and Medicaid payments, and $1.8 billion due to defense vendors.

On Aug. 4, the group estimates that the cash deficit will increase to $26 billion, with only $4 billion in revenue coming in, compared to $10 billion in bills, the largest of which would be for Medicaid and Medicare.

Come Aug. 5, the cash deficit grows another $5 billion to $31 billion.

By Aug. 15, the Bipartisan Policy Center estimates that the running cash deficit will hit $74
billion. That day the Treasury will take in an estimated $22 billion in revenue and have to pay out roughly $41 billion. The biggest bill that day is a $30 billion interest payment.

Cash on hand: What's not yet clear is how much cash Treasury might have on hand going into August.

The Bipartisan Policy Center estimates it might have enough, in theory, to pay bills in full until Aug. 10.

Even if that's right, however, Treasury may still decide to withhold some payments sooner to preserve cash to ensure it can make interest payments after Aug. 10.

It may also keep some cash on hand to ensure it can make principal payments on bonds coming due after Aug. 10.

Treasury will be able to hold bond auctions to roll over existing debt as it matures -- more than $450 billion is expected to come due in August.

However, if there isn't enough demand for Treasuries because of the uncertainty the political crisis in Washington has caused, those auctions may fail to raise all that Treasury needs to pay the principal due.

So Uncle Sam would have to pony up using the revenue coming in. That would mean even less money available to pay seniors, vets, small business owners and others who are part of the lifeblood of the U.S. economy.

With just two weeks left until the federal government runs out of money to pay all of its bills, President Barack Obama seized on the "Gang of Six" plan as a "very significant step" and urged congressional leaders to start discussing it.

"My hope ... is that they tomorrow are prepared to start talking turkey and actually getting down to the hard business of crafting a plan that can move this forward in time for the August 2nd deadline," Obama said.

The U.S. government will default on its obligations by that date if Congress does not allow the Treasury to sell more debt. That could force the U.S. economy back into recession and wreak havoc on global financial markets.

White House talks on a comprehensive deficit reduction deal have stalled over tax increases, which Republicans oppose. Obama, a Democrat, said he hoped the "Gang of Six" proposal -- which would require each party to ease back from entrenched positions -- could help form the basis of an agreement.

A broad deficit reduction package would clear the way for Congress to approve an increase in the $14.3 trillion federal debt ceiling. A backup plan by Senate Republican leader Mitch McConnell has gained momentum as a way to raise the ceiling and may end up incorporating parts of the "Gang of Six" proposal.

Senate Budget Committee Chairman Kent Conrad, one of the six Democratic and Republican senators who have been working since December on a deficit reduction plan, said the proposed $3.75 trillion in savings over 10 years contains $1.2 trillion in new revenues.

'11TH HOUR'

Obama's decision to speak to reporters about the "Gang of Six" plan even before he had fully read it showed the sense of crisis that is enveloping Washington as the clock ticks toward the August deadline.

"The problem we have now is we're in the 11th hour and we don't have a lot more time left," the president said.

The stalemate on debt talks has shaken global markets and credit rating agencies have warned they might downgrade the U.S. top-notch AAA rating if lawmakers do not agree on a broad-based deficit reduction plan.

A $3.75 trillion budget cut plan would exceed market expectations, said RBS Securities Treasury strategist John Briggs in Stamford, Connecticut.

News of the "Gang of Six" plan sent prices of 30-year U.S. bonds sharply higher and helped push U.S. stocks to their best day since March.

The plan quickly won support from many senators, including some conservative Republicans, and was rapidly gaining traction despite the fact it includes tax increases. Republican Senator Roger Wicker said it could pass the 100-seat Senate with a healthy majority of 60 or 70 votes.

But some aides urged caution, saying even if the plan proves popular in the Senate, there may not be time to craft it into detailed legislative language and then have it assessed by the Congressional Budget Office -- a necessary step -- before August 2.

Speaker of the House of Representatives John Boehner, the top Republican in Congress, has some concerns with the "Gang of Six" proposal, his spokesman Michael Steel said, adding the plan falls short in "some important areas."

BACKUP PLAN STILL BEING CONSIDERED

The "Gang of Six" plan came as White House and congressional negotiators worked on the premise that the only viable political solution to avoid default might be the backup plan proposed by McConnell.

His plan would hand Obama the authority -- and the blame -- for raising the $14.3 trillion debt ceiling. Democratic Senate Leader Harry Reid has proposed changes to make it attractive to Democrats, including up to $1.5 trillion in spending cuts.

"If there ... we can improve upon the legislation that we are doing, I am happy to take elements of the Gang of Six and work with them to get that done," Reid said.

Reid said he would like to begin consideration of the backup plan as soon as possible. Aides said that likely would not be until Saturday due to procedural hurdles.

The No. 2 Republican in the Senate, Jon Kyl, said he expects the McConnell plan to be approved in the Senate.

Obama said the backup plan was an important fallback in case lawmakers cannot agree on a broad deficit reduction plan.

Moody's Investors Service analyst Steven Hess said the McConnell/Reid plan would avoid any immediate downgrade of the coveted AAA rating.

But he said the plan did not offer a big enough deficit reduction and could result in a negative outlook on the rating, a sign of a possible downgrade in 12 to 18 months.

In the Republican-controlled House, a vote was expected on Tuesday on a deficit-reduction plan that would drastically cut and cap spending and require an amendment to the Constitution requiring a balanced budget. Obama said he would veto it.

The vote is largely symbolic as the measure is unlikely to pass the Democratic-controlled Senate. But it gives Republicans a chance to argue the need for deep spending cuts.

That could give Boehner, loathe to see Republicans blamed for a debt default, political cover to pursue a deal including less dramatic spending cuts than his party has so far sought.

The Senate will officially take up three trade deals and a scaled-back version of a jobs retraining program for laid-off workers on Thursday.

Senate negotiators will have to start pounding out the details of the trade deals, as well as

funding for the jobs retraining program -- whose funding ran dry in February.

"This was truly a bipartisan negotiation on all sides ... we think this is a strong package that reflected the different priorities," said one senior administration official on a call with reporters Tuesday.

But final passage on all the measures is not a done deal. Republican support depends on how closely the trade deals and jobs retraining program are linked together.

Republicans want to vote on the trade pacts, and have agreed to consider the new compromise that would extend the jobs retraining program, according to congressional aides. But they refuse to have the issues stuck together on the same bill, in a way that would prevent them from making changes to the jobs retraining program.

"I would strongly urge the Administration to re-think this action, and urge them to send up all three pending trade agreements without delay -- and without extraneous poison pills included," said Senate Minority Leader Mitch McConnell in a statement Tuesday.

If Congress were to pass the trade pacts without the jobs retraining program, President Obama would face a tough choice as he had previously said he couldn't have one without the other.

At issue is the Trade Adjustment Assistance program, which got a big funding boost with the 2009 economic Recovery Act.

The program gives unemployed workers financial help and job training when employers move jobs overseas. White House officials had previously said that more than 435,000 workers would be eligible for the program if it were reinstated. But Republicans have said they are concerned about funding such stimulus programs, because of the big deficits the nation faces.

A White House official outlined a compromise made on the program, saying it would be scaled back. He added that it wouldn't add to the deficit, thanks to cuts in unemployment insurance; and due to a new proposal that would penalize tax preparers who have "bad records," claiming tax credits for those who don't qualify.

But the White House couldn't give a final tab on Tuesday for the scaled back Trade Adjustment Assistance program.

An additional roadblock is that even though House Ways and Means Chairman Rep. David Camp was involved in the compromise, it's unclear whether even a scaled-back version could pass the GOP-controlled House

"We're pleased the President may finally send us the three job-creating trade agreements we've requested, but we have long said that TAA -- even this scaled-back version -- should be dealt with separately from the trade agreements," said Brendan Buck, spokesman for House Speaker John Boehner.

The one thing many congressional Republicans and Democrats can agree on is wanting to pass the trade deals to help boost the U.S. economy, particularly since some say the treaties could add as many as 250,000 jobs.

Despite Obama's effort to tie the trade pacts to something the unions want, the AFL-CIO and other labor groups continue to oppose the treaties -- which they say don't do enough to protect workers' rights.

But business groups from the U.S. Chamber of Commerce to the Business Roundtable applauded the move forward.

"With our economic recovery stalling, the time is now for Congress to act on these deals," said Thomas J. Donohue, president and CEO of the U.S. Chamber. "We simply cannot afford to put American jobs at risk any longer."