Consumer spending - which counts for roughly two-thirds of economic output - caused virtually all of the slowdown in the second quarter. This store in Chicago seems to have heard the message.
The pace of economic growth slowed abruptly in the second quarter of the year as consumers forced to pay higher energy bills curbed their spending on just about everything else, the government reported yesterday.
The Commerce Department estimated that the nation's gross domestic product - the broadest measure of economic activity - expanded at an annual rate of 3 percent in the April-to-June quarter, sharply below the 4.5 percent growth achieved in the first quarter of the year and less than the expectations of Wall Street analysts.
Many economists, mostly blaming the surge in energy prices for the slowdown, still expect growth to pick up in the second half of the year. But the downshift heightened broader concerns about whether American consumers - no longer enjoying big windfalls from tax cuts and mortgage refinancing - can continue to push the economy forward as strongly as in the past.
"The message is that growth in the second half should do better,'' said Nigel Gault, United States economist at Global Insight, a research firm. "But the consumer can't carry the burden of supporting growth'' alone much longer.
The slowdown was a setback to efforts by President Bush to point to solid growth as a validation of his administration's economic policies, and played into the hands of his Democratic challenger, Senator John Kerry, who has criticized the White House's economic approach.
In a speech at a campaign stop in Springfield, Mo., Mr. Bush did not mention the latest snapshot of the nation's economic performance. Instead, he urged support for his policies by stressing that the economy has grown relatively briskly for about a year, adding more than 1.5 million jobs since last August.
"We have more to do to make America's economy stronger,'' Mr. Bush said.
Treasury Secretary John Snow portrayed the gross domestic product report as evidence of "an economy growing at a steady pace."
By contrast, Jason Furman, an economic adviser in Senator Kerry's campaign, said that the slowdown in growth "makes it harder for them to make the argument that Bush's economic strategy is working.''
Mr. Furman added that the latest evidence "rebuts their argument that the economy is getting better and better."
The stock market barely reacted to the new statistics, but long-term interest rates fell and bond prices rose markedly, as slower growth indicated to investors that the Federal Reserve was less likely to push up its benchmark interest rate in an aggressive fashion.
Beyond the political positioning, the data painted a mixed scenario. Changes in consumer spending - which counts for roughly two-thirds of economic output - caused virtually all of the deceleration in the second quarter.
Personal consumption spending slowed to a 1 percent annual growth rate, the most sluggish pace since the second quarter of 2001, when the economy was in the midst of a recession, down from a rate of 4.1 percent in the first three months of the year. Sales of durable goods - things like cars, furniture and appliances - actually fell slightly.
"The consumer is overextended," said Charles Dumas, chief international economist at Lombard Street Research in London.
Other parts of the economy, however, fared much better.
Residential construction continued at a sizzling pace, growing by 10 percent compared with the first quarter of the year as still-low interest rates continued to fuel the housing market.
Companies also stepped up their investment in new equipment, with business spending growing by 8.9 percent - almost double the rate of the previous quarter. They built up inventories by a small amount in anticipation of a renewal of healthier consumer spending. Exports also grew at a much faster pace, benefiting from a weaker dollar.
These sources of growth were insufficient, however, to make up for the slowing pace of consumer purchases.
Some businesses still focused on reducing bloated stocks from past periods of disappointing sales. "We haven't won the battle with inventories yet," said George Pippis, sales analysis manager at Ford Motor. Indeed, the diminished output of motor vehicles alone subtracted a full percent of growth from the quarterly expansion.
The government contribution to the economy waned, too, constrained by a budget deficit that is now predicted to reach $445 billion by the end of the fiscal year on Sept. 30. Federal spending slowed to a 2.7 percent growth rate from 7.1 percent in the preceding three months.
The economic data did provide a mild dose of good news for President Bush. In part because an earlier revision of initial estimates found that the economy shrank slightly in the third quarter of 2000, administration officials have argued that Mr. Bush inherited the recession (officially dated from March to November 2001) from his predecessor, President Clinton.
Now, according to fresh revisions presented yesterday by the Commerce Department, the downturn of 2001 looks even spottier and lighter then previously estimated, with gross domestic product contracting by 0.2 percent in the first three quarters of 2001, instead of 0.7 percent.
Yet even as the downturn was milder than first reported, so the recovery was weaker. The average annual rate of gross domestic product growth from the fourth quarter of 2001 to the first quarter of 2004 remained unchanged at 2.5 percent.
For the economic expansion to return to brisker growth, businesses will need to pick up the baton from consumers - investing more in capital equipment and adding more jobs so that income growth from wages and salaries can in turn refuel spending.
Job growth, however, took a dip in June, expanding by barely 112,000, less than necessary to absorb the natural growth of the labor force. Wages, adjusted for inflation, declined and the average number of hours in the work week fell.
"The negative factors are building up," Mr. Dumas said.
Some economists suggested, however, that the soft patch in the second quarter is more likely to be temporary than a serious roadblock to sustained growth. Higher inflation - which pushed the gross domestic product price index up by 3.2 percent in the quarter - was mostly due to energy price increases. Indeed, the so-called core inflation rate, which excludes the effects of food and energy, rose only 2.4 percent, lower than in the previous quarter.
Robert Barbera, chief economist at IG Hoenig, argued that with oil prices currently hovering around $40 a barrel, they were unlikely to go much higher. "The energy price effect,'' he said, is "a one-time squeeze on purchasing power."
Mr. Barbera further added that current low inventories bode well for the future. They would allow businesses to react quickly to signs of increasing demand, immediately ramping up production, investing in capital equipment and hiring more workers.
Several other signs also point to a rebound in economic growth. Weekly jobless claims stayed comfortably under 350,000 in July, a level that often suggests robust employment gains. Recent indicators suggest the pace of manufacturing is picking up again.
Even auto sales bounced back in July after a bout of weakness in June. "In the second half,'' Mr. Pippis at Ford predicted, "we will start seeing the impact of job growth.''
Mr. Gault, the economist, agreed - to a point. "I don't think this is the start of the big consumer pullback yet," he said. "But the underlying force is that consumer spending growth will slow."
EDUARDO PORTER
NY Times
