Wary Consumers Snuff 2Q Economic Growth

A 15-story apartment building rises near the Soldiers' and Sailors' Memorial Arch at Grand Army Plaza in the Brooklyn borough of New York Wednesday, July 26, 2006. The 100 unit building is designed by architect Richard Meier. The Commerce Department reported Thursday sales of new homes fell in June by the largest amount in four months while the inventory of unsold homes climbed to a record high, providing further evidence that the once-booming housing sector is slowing. (AP Photo/Mark Lennihan) (Mark Lennihan - AP)

Federal Reserve Chairman Ben Bernanke told Congress last week that he is concerned about rising inflation, but he also said that the Fed believes moderating economic activity will eventually lessen inflation pressures.

Given that assessment, Wall Street investors and some economists believe the Fed might take a breather in its two-year-old rate-raising campaign at its next meeting, on Aug. 8.

Some economists, however, continue to predict that rates will be boosted again at the August meeting to ward off rising inflation; after that, they think the Fed may move to the sidelines.

"This whole situation creates even more of a dilemma for Bernanke, who has to weigh the clearly slowing economy against accelerating and now uncomfortably high inflation," said Mark Zandi, chief economist at Moody's Economy.com.

On the one hand, the Fed doesn't want to hoist rates too much and cripple the economy; on the other hand, it doesn't want to take a respite too soon and let inflation get out of control.

The downshift in economic growth comes as President Bush is getting low marks from the public for his economic stewardship.

Consumers, a major force shaping overall economic activity, had a smaller appetite for spending in the second quarter. They boosted spending at just a 2.5 percent pace, down from a 4.8 percent growth rate in the first quarter. Much of that weakness reflected cutbacks on big-ticket goods such as cars.

Businesses also tightened the belt.

Spending on home building fell at a 6.3 percent pace in the second quarter, the deepest dip in nearly six years. Rising mortgage rates are clipping demand.

Businesses sliced spending on equipment and software at a 1 percent pace, the first cut in just over three years.

The government also issued annual revisions that showed the economy grew at an average annual rate of 3.2 percent from 2003 through 2005, or 0.3 percentage point less than previously estimated.

Growth in the second half of this year is expected to stay subdued at a pace of around 2.5 percent to 3 percent, some economists said.

Even with the second quarter's deterioration in growth, economists said chances of a more serious backslide into a recession remain fairly low at this point. "If you just looked at the deceleration from the first quarter, you would think the economy tanked," said Joel Naroff of Naroff Economic Advisors. "It did not."

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On the Net:

GDP: http://www.commerce.gov/

Employment cost index: http://www.bls.gov/