Economy slows sharply in spring

Friday, July 30th 2004, 8:42 am

By: News On 6

WASHINGTON (AP) _ The U.S. economy grew at an annual rate of just 3 percent in the spring, a dramatic slowdown from the rapid pace of the past year, as consumer spending fell to the weakest rate since the slowdown of 2001, the government reported Friday.

The Commerce Department said that the gross domestic product, the country's total output of goods and services, slowed sharply in the April-June quarter from a 4.5 percent growth rate in the first three months of the year.

The size of the slowdown caught economists by surprise. Many had been looking for GDP growth to come in around 3.8 percent in the second quarter. Even that would have been a sharp deceleration for an economy that had been growing at a 5.4 percent annual rate through the year ending in March.

It raised the issue of whether the economy, which Federal Reserve Chairman Alan Greenspan said last week had encountered a ``soft patch'' in June, could be in danger of seeing growth falter even more in coming quarters.

In one piece of good news, inflation pressures eased with a key GDP inflation gauge that excludes energy and food rising at an annual rate of just 1.8 percent in the second quarter, down from a 2.1 percent increase in the first quarter.

President Bush is counting on strong economic growth to generate sizable gains in employment in coming months to give voters a good feeling about the economy as they go to the polls on Nov. 2.

However, Democratic challenger John Kerry contends that Bush is pursuing a failed economic policy that has produced the worst jobs record of any president since Herbert Hoover and is subjecting Americans to a ``middle class squeeze'' of falling wages and rising costs for health care and education.

The 3 percent GDP growth rate in the second quarter was the slowest growth since the economy was expanding at a lackluster 1.9 percent rate in the first quarter of 2003.

Over the next four quarters, the economy tuned in a sizzling performance with GDP growth rates of 4.1 percent in the second quarter of 2003 and 7.4 percent in the third quarter, a pace that was the fastest in 20 years, and 4.2 percent in the fourth quarter and 4.5 percent in the first quarter of this year.

The slowdown in the second quarter stemmed from a sharp slowing in consumer spending which rose at an annual rate of just 1 percent, the smallest increase since a similar 1 percent rise in the second quarter of 2001, when the economy was slumping.

All of the GDP figures from 2001 through 2003 were revised with Friday's release as part of an annual revision to the numbers to reflect new sources data.

Those revisions changed the annual GDP rates only slightly but did alter significantly the quarterly GDP changes. There are no longer three consecutive declining quarters of GDP in 2001 during the period that the National Bureau of Economic Research has formally ruled that the country was in a recession. Instead, the GDP demonstrated a sawtooth pattern of a decline followed by a quarter of growth.

The weak growth in consumer spending reflected a big drop in auto sales and other durable goods which fell at an annual rate of 2.5 percent in the second quarter.

Offsetting the weakness in consumer spending, business investment and residential housing continued to race ahead during the quarter.

But consumer spending is critical, given that it accounts for two-thirds of total economic activity. Many economists believe the slowdown in consumer demand will be temporary. They point to strong job growth in recent months and rising consumer confidence. They believe that will provide support for a rebound in consumer spending in the months ahead.

The Federal Reserve began raising interest rates on June 30 and Greenspan indicated that further rate hikes will likely come at a gradual pace as long as inflation does not threaten to get out of hand.