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U.S. Economy Grew More Slowly Than Expected in 2nd Quarter

New York Times
July 30, 2004

Economic growth slowed more abruptly than expected in the second quarter of the year, as higher energy prices prompted consumers to slow their spending, the government said today.

The Commerce Department reported that gross domestic product — the broadest measure of the nation's domestic output — expanded by 3 percent at an annual rate in the April-to-June quarter, sharply slower than the 4.5 percent growth achieved in the first quarter of the year and significantly below the 3.7 percent forecast by Wall Street forecasters.

The slowdown came as a setback to the efforts of President Bush to portray solid economic growth as a validation of his administration's economic policies. But it played into the hands of his Democratic challenger, Senator John Kerry, who has criticized the president's administration of the economy as a failed strategy.

Jason Furman, an economic adviser to the Kerry campaign, said that the slowdown in growth "makes it harder for them to make the argument that Bush's economic strategy is working," adding, "It rebuts their argument that the economy is getting better and better."

Treasury Secretary John W. Snow offered a pointedly different view. "Today's report on G.D.P. growth shows an economy growing at a steady pace," Mr. Snow said. "G.D.P growth over the past two quarters demonstrates the economic progress made by millions of American families and businesses. We're on a positive track and the fundamentals are solid for the future."

In a campaign stop in Springfield, Mo., President Bush omitted any mention of the new data. Instead, he stressed that the economy had grown briskly since last summer, adding more than 1.5 million jobs since last August.

"We have more to do to make America's economy stronger," he said. "We've come through a recession, terrorist attacks, corporate scandals. We overcame these obstacles because of the hard work and will of the American entrepreneur, the small business owner, the farmers and the workers. And we came through these obstacles because of well-timed tax cuts."

Consumers — who have been the strongest pillar of the recovery so far — were most responsible for the slowdown. Personal consumer spending expanded by barely one percent in the quarter, the most sluggish pace since the second quarter of 2001, when the economy was still mired in recession.

Consumption of durable goods fell, shaving 0.21 percentage points off output growth. Declining sales of nondurable goods also subtracted 0.01 percentage points from the expansion. Over all, personal consumption added barely 0.73 percentage points to the gross domestic product — barely one-fourth of its contribution in the first quarter of the year.

Businesses picked up some of the slack. Nonresidential investment grew by 8.9 percent, almost double the rate of the previous quarter — fueled by a pickup in factory building, and investment in equipment and software. But the effort was insufficient to compensate for the slackening consumer. Inventory growth also had a meager contribution to output, as businesses held back from stepping up production, contributing only 0.28 percent to economic growth in the quarter.

Many economists pointed out, however, that the economy is likely to improve. Though the slowdown did raise concerns about the spending capacity of the American consumer after years of rising household debt, forecasters noted that higher energy prices were the main cause of slower spending in the quarter, eating into consumer's purchasing power.

As oil prices approach their ceiling, future price increases should moderate, freeing up more income for households to spend. As that takes place, the economy should rebound.

"The best bet is that we will get some acceleration in the second half of the year," said Nigel Gault, United States economist at Global Insight, a research firm.

Bob Barbera, chief economist at I.G. Hoenig, added that with strong balance sheets and lean inventories, businesses were in an excellent position to respond to increasing demand by ramping up production. "The energy price is a one-time phenomenon," Mr. Barbera said.





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