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Economists concerned as US GDP slows to 3%

The US 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 US Commerce Department reported on Friday.

The April to June advance in the GDP 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 US President George W. 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.

Secretary of the Treasury 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.

Democratic presidential candidate Senator John Kerry, however, drew a contrast with the economy during the Clinton administration.

"Guess what? In the last four years, the income of average Americans has dropped by US$1,600" while the cost of health care, education and gasoline have gone up, he told a crowd at a rally in Harrisburg, Pennsylvania, on Friday.

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.

Last month's jobs data will be released Aug. 6.

"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 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 last month 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.

Bush talks often of the economy's creation of 1.5 million new jobs in the past 10 months. Kerry 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.

The 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.

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.
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