U.S. Economy Slows Drastically in Spring

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WASHINGTON - The U.S. economy slowed dramatically in the spring to an annual growth rate of 3 percent, as consumers, worried about higher gasoline prices, cut back their spending to the weakest pace in three years, the Commerce Department reported Friday.

The April-June advance in the gross domestic product, the country's output of goods and services, was below the 3.8 percent increase many economists had expected and was significantly down from a revised 4.5 percent growth rate in the first three months of the year.

The administration, counting on a rebounding economy to bolster President Bush's re-election prospects, insisted the second-quarter slowdown was only temporary and forecast that growth would rebound in the second half of the year.

Treasury Secretary John Snow noted the upward revision of the first-quarter GDP figures with the lower-than-expected second quarter figure. If the two figures were averaged together, he said, it gave evidence of an economy growing at a solid 3.75 percent rate.

"We're on a positive track, and the fundamentals are solid for the future," Snow said in a statement.

Private economists were troubled that the second-quarter slowdown could develop into something worse, especially if job growth fails to rebound after a disappointing rise of just 112,000 payroll jobs in June. The July jobs data will be released next Friday.

"All in all, the GDP was a disappointing report," said Mark Zandi, chief economist at Economy.com. "All the surprises were on the downside."

The weaker-than-expected GDP number gave Wall Street more to worry about in terms of how strong the economy will perform in the second half of this year. The Dow Jones industrial average managed to finish the day up a slight 10.47 points at 10,139.71, not enough to wipe out steep losses for July.

The biggest drag on second quarter GDP came from consumer spending, which rose by just 1 percent in the second quarter, the weakest showing since a similar 1 percent rise in the second quarter of 2001, when the economy was in recession. Consumer spending, a main driver of the recovery, accounts for two-thirds of American economic activity.

The weakness came from a 2.5 percent decline in spending on big-ticket items such as automobiles.

Analysts noted, however, that auto sales, after a bad June, have improved in July as dealers resumed offering incentives to boost sales. Economists said they still expect GDP growth to come in at 4 percent or better rate in the second half of the year, which would be strong enough to generate new jobs and maintain the decline in unemployment.

Campaigning for a second term, Bush talks often of the economy's creation of 1.5 million new jobs in the past 10 months. His Democratic challenger, John Kerry (news - web sites), argues that this still leaves the country with 1.1 million fewer jobs than when Bush took office in January 2001.

Kerry contends 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.

Friday's GDP report was the latest indication that the economy, which had been racing ahead in recent months, hit what Federal Reserve Chairman Alan Greenspan described as a "soft patch" in June.

Sung Won Sohn, chief economist at Wells Fargo in Minneapolis, said the problem was that many of the factors that had provided stimuli, such as Bush's tax cuts and low interest rates supplied by the Fed, were beginning to wane. The Fed raised interest rates for the first time in four years on June 30 with more rate hikes expected in coming months.

Sohn said the GDP report provided evidence that other sectors were beginning to take up the slack, with business investment rising at a solid 8.9 percent rate, propelled by a 10 percent increase in sales of equipment and software.

Inflation remained tame in the second quarter, as reflected by a GDP inflation gauge favored by Greenspan: excluding energy and food, prices rose at an annual rate of just 1.8 percent, down slightly from a 2.1 percent increase in the first quarter.

As long as inflation is under control, Greenspan told Congress last week, the Fed will move rates upward at a measured pace.

The 3 percent GDP growth rate in the second quarter was the slowest growth in more than a year, since the economy expanded at a lackluster 1.9 percent rate in the first quarter 2003.

Over the succeeding four quarters, the economy turned in sizzling performances with consecutive GDP growth rates of 4.1 percent, 7.4 percent, 4.2 percent and 4.5 percent.

The 7.4 percent rate for last year's third quarter was revised from an original 8.2 percent. All the quarterly GDP figures over the past three years were revised Friday as part of the government's annual update to reflect new source data.