U.S. Economy Slows After Winter's Splurge

Growth Falls Sharply To 3% as Consumers Curb Spending

U.S. economic growth slowed this spring to its weakest pace in more than a year as Americans reined in spending as prices for energy and other items rose, the government reported yesterday.

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. That's 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 increase since the 2001 recession, and far below the 4.1 percent jump in the first quarter of the year.

The slowdown renewed concerns about the vibrancy of the economy's recovery, which had strengthened over the past year as businesses and households spent more in response to tax cuts and low interest rates. Most economists had expected that by now, rising demand would generate robust growth in jobs, wages and consumer purchases.

But by spring, the effect of the tax cuts was fading, and interest rates and gasoline prices were rising. In recent months the pace of employment gains slowed, average weekly wages fell after adjusting for inflation, and consumer spending turned sluggish.

Slower GDP growth, the worsening U.S. trade deficit and an 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.

Federal Reserve Chairman Alan Greenspan said last week on Capitol Hill that the economy had hit a "soft patch" but that he expects it to pass as consumer spending picks up in the months ahead.

Several economists agreed yesterday that the economy is likely to continue to grow steadily. They noted other signs of strength in the Commerce Department report, which showed business investment, residential construction and exports all rising strongly.

But with consumer spending accounting for two-thirds of the nation's economic activity, the vigor of the expansion will depend on job and wage gains. A 3 percent annual growth rate, while solid, is not likely to generate enough jobs to dent the 5.6 percent unemployment rate, analysts said.

The new numbers came out the day after Sen. John F. Kerry (D-Mass.) accepted his party's presidential nomination in a speech that excoriated President Bush's economic policies.