U.S. Economy Slows After Winter's Splurge

"Wages are falling, health care costs are rising and our great middle class is shrinking. . . . We can do better and we will," Kerry said.

The Bush administration countered yesterday that the GDP figures show the economy is growing steadily, causing employment and consumer confidence to swell.

"This is all further evidence that the economic growth and job creation ignited by the President's tax cuts will continue," Treasury Secretary John Snow said in a statement.

One wild card in the economic outlook is oil prices, which reached another high yesterday.

Analysts blamed much of the recent consumer pullback on energy costs, which surged as Middle East turmoil fed anxieties about world oil supplies. Although oil prices receded somewhat in June, they rose again this week because of uncertainties besetting Russia's Yukos Oil Co., which accounts for about 2 percent of daily global crude oil production.

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

Renewed incentives have already boosted July sales, encouraging some economists to believe that consumer spending is already rebounding.

"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 Bank, told clients yesterday. Sohn forecast that the economy would 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, said Gina Martin, an economist for Wachovia Economics Group. The oil price spike yesterday reflects "people overreacting" to worries about Yukos, she said, adding that prices should moderate somewhat in the fall after the U.S. summer driving season ends. That bodes well, she said, for consumer spending and overall economic growth in coming months.

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 a Commerce Department inflation measure tied to the GDP.

That cut into gains in personal income, which, on an inflation-adjusted basis, rose 2.9 percent in the second quarter -- a slowdown from the 3.2 percent gain in the first quarter.

Excluding volatile food and energy prices, the so-called "core" price index rose at a 1.8 percent annual rate in the last 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.

The report reinforced many analysts' expectations 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.