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.
"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.