Economic Growth Weaker Than Expected

Renewed incentives have already boosted July sales, encouraging some economists to agree with Federal Reserve Chairman Alan Greenspan that consumer spending should rebound in the months ahead.

"Early indications are that the economy is moving out of the soft patch and stepping onto firmer ground," Sung Won Sohn, chief economist for Wells Fargo Banks, told clients today.

"Detroit has boosted incentives. . . . Housing related activities are in the process of setting another record in 2004. Businesses should continue to invest in equipment and inventories," Sohn said, forecasting that the economy should grow at a 4 percent to 4.5 percent annual rate during the second half of this year.

Oil prices will probably remain volatile for the summer, Martin said in an interview. But, she said, today's oil price spike reflects "people overreacting" to the worries about Yukos. She added that prices should calm down and moderate somewhat in the fall, after the U.S. summer driving season ends and oil demand ebbs.

This bodes well for a bounce back in consumer spending and growth in coming months, she said. "I agree with Greenspan."

Some analysts were less sanguine. The second-quarter slowdown in growth, the worsening U.S. trade deficit and Americans' overall low savings rate "all raise increasingly serious questions about the strength and sustainability of the current cyclical recovery in the months ahead," said Charles W. McMillion, president and chief economist of MBG Information Services.

Higher energy prices helped push up consumer prices at a 3.3 percent seasonally adjusted annual rate in the second quarter, the same pace as in the first quarter, according to Commerce's inflation measure, the personal consumption expenditure price index.

That helped trim the growth of consumer buying power. After-tax personal income, adjusted for inflation, rose 2.9 percent in the second quarter, a slow-down from the 3.2 percent gain in the first quarter.

However, after excluding volatile food and energy prices, the so-called "core" price index rose at just a 1.8 percent annual rate in the past three months, a slowdown from the 2.1 percent pace of price increases in the first quarter and well within the Fed's comfort range.

Fed policymakers prefer the core rate because they see it as a measure of underlying inflation. The report reinforced many analysts' expectation that the central bank will raise its benchmark overnight interest rate to 1.50 percent from 1.25 percent at its next policymaking meeting, Aug. 10.

But because the core rate of inflation remained mild, the Fed can likely adhere to its plans to raise rates gradually in the months ahead.

Commerce also released revised GDP figures that show the 2001 recession was milder and the recovery since then not as strong as previously reported. The downturn began in March and ended in November of that year, according to the National Bureau of Economic Research, the official timer of U.S. recessions.

The economy shrank at an annual rate of 0.2 percent in the first three quarters of 2001, the new numbers show, compared with the previously reported drop of 0.7 percent. GDP then rose at an average annual rate of 3.3 percent from the third quarter of 2001 through first quarter of this year, slightly below the 3.4 percent average increase earlier estimated.

The economy grew 0.8 percent in 2001, the new figures show, slightly better than the 0.5 percent reported earlier.

The revisions altered the quarterly GDP figures more than the overall annual economic growth rates. Commerce had previously said the economy contracted for three consecutive quarters in 2001. The revisions show that economic output seesawed, falling in the first and third quarters of 2001 and rising in the second and fourth quarters.

The revisions also altered the more recent snapshots of the economy's progress. Seasonally adjusted GDP rose at a 4.5 percent annual rate in the first quarter, significantly better than the previously estimated 3.9 percent rate, for example. But GDP grew more slowly than earlier thought in the third quarter of last year, rising at a 7.4 percent rate rather than the 8.2 percent pace reported before.