Economic Growth Weaker Than Expected

U.S. economic growth slowed sharply in the spring to its weakest pace in more than a year as higher energy prices sapped consumers' buying power, the government reported today.

The nation's output of goods and services, or gross domestic product, rose at a 3 percent annual rate, adjusted for inflation, in the April through June period, down from the much stronger 4.5 percent rate of the first three months of the year, the Commerce Department said.

The drop primarily reflected skidding consumer spending, which rose at a meager 1 percent annual rate in the second quarter, the slowest rate since the 1 percent gain recorded in the spring of 2001 -- the beginning of the last recession.

Consumer spending had jumped at a 4.1 percent annual pace in the first quarter, boosted in part by federal tax cuts and very low interest rates. But by spring, the effects of the tax cut were fading and both interest rates and gasoline prices were rising, with gas hitting an all-time high national average of $2.054 for a gallon of unleaded regular on May 26.

Analysts were divided about whether the figures reflect a brief hiccup in the expansion or the beginning of a more serious slump.

The optimists noted other signs of strength in the report, which showed business investment, residential construction and exports all rising robustly. But with consumer spending accounting for two-thirds of the nation's economic activity, the vigor of the expansion will depend critically on the vibrancy of job and wage gains, as well as on wild cards such as the course of oil prices.

Analysts generally blamed much of the spring consumer pull-back on energy prices, which surged as Mideast turmoil fed anxieties about world oil supplies. Although oil prices receded somewhat in June, they rose again this week to new highs because of concerns about the political problems besetting Russia's Yukos Oil Co., which accounts for about 2 percent of daily global crude oil production.

Prices for benchmark crude scheduled for September delivery hit $43.50 in morning trading today on the New York Mercantile Exchange, the highest price recorded since such trading began in 1983.

"Higher oil prices and negative news from Iraq proved formidable headwinds for the economy last quarter," Gina Martin, economist for Wachovia Economics Group, wrote in a note to clients today.

Another drag on consumer spending was U.S. automakers' efforts to reduce the rebates and other financial incentives they have offered on new car and truck purchases. Shoppers refused to go along with the plan and auto sales plunged in June.