Economy Cools Amid Shopping Slowdown

Fri Jul 30, 2004
By Tim Ahmann

WASHINGTON (Reuters) - The U.S. economy lost steam in the second quarter as consumers hit by high energy costs turned thrifty, notching their smallest increase in spending since the 2001 recession, government data released on Friday showed.

U.S. gross domestic product, a measure of total output within the nation's borders, climbed at a modest and weaker-than-expected 3 percent annual rate in the April-June period after an upwardly revised 4.5 percent clip at the start of the year, Commerce Department data showed.

Consumer spending rose at a paltry 1 percent rate, a mere shadow of the 4.1 percent jump of the first quarter and the weakest gain since the second quarter of 2001, when the economy was in recession.

The degree to which consumers retrenched surprised Wall Street analysts. Moody's Investors Service chief economist John Lonski called the spending gain "shockingly small."

While GDP growth proved weaker than expected, the economy's pulse has already shown signs of quickening. Other data on Friday showed consumer spirits have brightened a bit this month, while business activity has picked up in the Midwest.

Bond prices rose as investors saw weakness, but the dollar moved higher against the euro as foreign exchange traders saw strength. Stock prices were little changed.


For President Bush, who hopes a strong expansion will help him retain the White House in November's election, the blow from the tepid second quarter was lessened by the upward revisions to growth in the January-March period.

"When you combine the first quarter and the second quarter ... we're growing at 3.75 percent, which is (a) very strong growth rate and very sustainable," Treasury Secretary John Snow told WDAY radio in Fargo, North Dakota.

Democratic Sen. John Kerry's campaign used the data to call attention to what they termed as Bush's "failed policies."

"Clearly this is a disappointing number, but our focus isn't on any single quarter, it's on how to reverse the failed policies of the last four years," Kerry campaign spokesman Phil Singer said.

In an updated forecast, the White House said the economy would likely expand 4.7 percent this year, a touch above the 4.5 percent consensus projection in the latest issue of the closely watched Blue Chip Economic Indicators newsletter.

Analysts said big energy price hikes were one factor that hit consumer spending in the spring.

Inflation -- gauged by a measure favored by policy-makers at the Federal Reserve -- rose at a relatively speedy 3.3 percent rate in the second quarter, the same as at the start of the year.

However, stripping out often-volatile food and energy prices, the price gauge for consumer spending climbed at only a 1.8 percent rate, a slowdown from a 2.1 percent increase in the first quarter that helped soothe bond investors.

Fed officials have said they should be able to move borrowing costs higher at a "measured" pace unless it sees a risk of broad-based inflation.

The slowing in so-called core inflation was seen as bolstering the case for gradual rate rises.

"What we see in this data is the Fed will stick to their measured pace or maybe even slow down a bit," said Kevin Logan, an economist with Dresdner Kleinwort Wasserstein in New York.

The GDP report showed businesses ramped up spending on capital equipment and structures, pushing it ahead at a solid 8.9 percent pace, more than double the January-March rise.

"The vigor in investment spending is especially heartening and suggests that as long as the consumer gets back on track this summer, the economy should be in great shape," said Steve Stanley, chief economist at RBS Greenwich Capital.

Activity in the housing sector also picked up.

A separate report showed consumers' moods have brightened a bit this month, suggesting spending could quicken. The University of Michigan's final July sentiment index rose to 96.7 from 95.6 last month, according to sources who saw the subscription-only report.

Another report showed business activity picking up in the Midwest. The business barometer from the National Association of Purchasing Management-Chicago rose to 64.7 in July from 56.4 in June, suggesting a factory recovery is gaining traction.




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