U.S. Economy’s Growth Slows in Second Quarter

The nation’s economy slowed sharply in the second quarter, the government reported Friday, renewing concerns about whether modest expansion might persist and dampen job creation.

The less-than-expected 3% annualized growth rate in gross domestic product -- the value of all goods and services produced in the U.S. -- was the slowest in more than a year, the Commerce Department said. The relatively modest April-June performance was affected primarily by consumers closing their pocketbooks.

The increase in second-quarter GDP was down from an upwardly revised 4.5% rate in the first quarter, 4.1% in the year-earlier second quarter and the sizzling 7.4% pace of last year’s third quarter.

The consensus among economists had been that growth would hit 3.7% in the latest period.

“The economy has clearly downshifted,” said Mark Zandi, chief economist at Economy.com., a West Chester, Pa., research firm.

Modest growth, if continued, could have significant ramifications for the presidential election.

Surveys show that many voters don’t believe they have fully benefited from the economic recovery, given weak wage increases and persistent job insecurities. Democrats have attacked President Bush for a net decline of 1.1 million jobs during his term.

The GDP report is “clearly ... disappointing,” Phil Singer, a spokesman for Sen. John F. Kerry’s Democratic presidential campaign, told Reuters. “But our focus isn’t on any single quarter. It’s on how to reverse the failed policies of the last four years.”

Although a 3% annual growth rate is consistent with the nation’s historical average, the economy must grow at least 4% a year to generate the 200,000 monthly net job gains necessary to significantly reduce unemployment, some economists believe.

Such payroll growth also is needed to boost the economies of key election battleground states such as Ohio, Michigan and Pennsylvania, where many manufacturing positions have been lost.

The Bush administration cast the latest GDP report in a positive light, noting the first-quarter figure was revised sharply upward from 3.9%.

“Growth over the past two quarters demonstrates the economic progress made by millions of American families and businesses,” Treasury Secretary John W. Snow said in a statement. “We’re on a positive track, and the fundamentals are solid.”

Federal Reserve Chairman Alan Greenspan and many economists have predicted that the second quarter was just a temporary detour on the way to annualized growth of 4% or more for the remainder of this year.

Economic data for July -- including pickups in consumer confidence, Chicago-area manufacturing and retail and auto sales -- appear to bolster that contention. For example, the University of Michigan’s consumer confidence index, released Friday, rose slightly in July from June.

Perhaps because of those other indicators, investors largely dismissed the disappointing GDP data. Major stock indexes posted slight gains Friday.

However, economists warn, several dark clouds loom. Among them: a continuation of current record oil prices, now above $43 a barrel.

“Once oil gets to $50 or higher, then the economy really gets in trouble,” said Sung Won Sohn, chief economist for Wells Fargo & Co.

A slowing housing market is another concern, said Edward Leamer, director of the UCLA Anderson Forecast. Eight of the last 10 recessions, he said, were triggered by slumps in housing or in consumer purchases of autos and other so-called durable goods.

The next important snapshot of the economy’s strength will come Friday with the government’s employment report for July. Many economists expect a net boost of at least 200,000 jobs, rebounding from the disappointing 112,000 rise in June.

Barring a dismal job report, the Fed will continue its policy of “measured” interest-rate hikes to guard against rising inflation, economists said. The central bank is expected to raise its benchmark short-term interest rate another quarter point, to 1.5%, when its policymaking committee meets Aug. 10.

The second-quarter GDP growth rate, which is still subject to revisions, was the slowest since a 1.9% rise in the first three months of 2003. Weaker consumer spending, particularly for autos, was the primary culprit.

Consumer spending grew by only 1%, the weakest gain in three years and significantly below the 4.1% January-March jump. Economists blamed higher gasoline prices, the fading stimulus of the president’s tax cuts and lousy weather in some regions.

Consumer spending is considered particularly important because it accounts for two-thirds of economic activity.

On the brighter side, businesses boosted spending on capital equipment and structures at an impressive 8.9% pace, more than double the 4.2% January-March rise. The surge in these expenditures suggests that “the economic baton is passing from consumers to businesses,” Sohn said.

Another bright spot came on the inflation front. A price index closely watched by Greenspan and other Fed officials showed that so-called core inflation -- excluding volatile food and energy prices -- rose only 1.8% in the second quarter, down from 2.1% in the previous quarter.

As part of its GDP report, the Commerce Department also released Friday revised economic data for previous years that suggest that there may not have been a recession in 2001 after all.

The new data showed that economic growth fell in the first and third quarters of 2001, but grew in the second quarter. Previous data showed three straight quarterly declines.

A recession is traditionally defined by two or more consecutive quarters of economic shrinkage.

Political partisans have argued over whether the economy began slowing under Bush’s Republican administration or that of his Democratic predecessor, Bill Clinton.

Also on Friday, the Labor Department released a report that raised new questions about the quality of new jobs. It showed that one in five Americans laid off from a long-term job in the last three years was still unemployed in January. And most who found work were paid less.