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Archive for Saturday, July 31, 2004

Economists troubled by second-quarter slowdown

Consumer spending reaches three-year low

July 31, 2004

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— The U.S. economy slowed dramatically in the spring to an annual growth rate of 3 percent, as consumers, worried about higher gasoline prices, cut back their spending to the weakest pace in three years, the Commerce Department reported Friday.

The April-June advance in the gross domestic product, the country's output of goods and services, was below the 3.8 percent increase many economists had expected and was significantly down from a revised 4.5 percent growth rate in the first three months of the year.

The administration, counting on a rebounding economy to bolster President Bush's re-election prospects, insisted the second-quarter slowdown was only temporary and forecast that growth would rebound in the second half of the year.

Treasury Secretary John Snow noted the upward revision of the first-quarter GDP figures with the lower-than-expected second quarter figure. If the two figures were averaged together, he said, it gave evidence of an economy growing at a solid 3.75 percent rate.

"We're on a positive track, and the fundamentals are solid for the future," Snow said.

Private economists were troubled that the second-quarter slowdown could develop into something worse, especially if job growth fails to rebound after a disappointing rise of just 112,000 payroll jobs in June. The July jobs data will be released Friday.

"All in all, the GDP was a disappointing report," said Mark Zandi, chief economist at Economy.com. "All the surprises were on the downside."

The biggest drag came from consumer spending, which rose by just 1 percent in the second quarter, the weakest showing since a similar 1 percent rise in the second quarter of 2001, when the economy was in recession. Consumer spending, a main driver of the recovery, accounts for two-thirds of American economic activity.

The weakness came from a 2.5 percent decline in spending on big-ticket items such as automobiles.

Analysts noted, however, that auto sales, after a bad June, have improved in July as dealers resumed offering incentives to boost sales. Economists said they still expected GDP growth to come in at a 4 percent or better rate in the second half of the year.

Friday's GDP report was the latest indication that the economy, which had been racing ahead in recent months, hit what Federal Reserve Chairman Alan Greenspan described as a "soft patch" in June.

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