Fri Jul 30, 2004
By Tim Ahmann

WASHINGTON (Reuters) - U.S. economic growth braked more sharply than expected in the second quarter as shoppers curbed their free-spending ways amid a sharp advance in energy prices, 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 3 percent annual pace in the April-June period after an upwardly revised 4.5 percent clip at the start of the year, the Commerce Department said.

Wall Street economists, who had looked for GDP to slow less sharply to a 3.6 percent pace after the first-quarter's previously reported 3.9 percent advance, said they were surprised by the big pullback in consumer spending.

"We're looking at a more pronounced than expected slowing of economic activity, mostly because of the shockingly small increase by consumer spending," Moody's Investors Service chief economist John Lonski said.

While the latest quarter proved weaker than expected, the economy is already showing signs of quicker growth. Other data on Friday showed consumer spirits have brightened a bit this month, while business activity has picked up in the Midwest.

The dollar slipped against the euro, while prices for U.S. bonds move higher after the data as investors bet on an easier pace of interest-rate rises from the Federal Reserve. Stocks initially moved lower, but were up marginally by late morning.

PRICES HIT SPENDING

Still, the tepid second-quarter growth figure is no boon for President Bush, who wants a stronger expansion as the November presidential election approaches.

Consumer spending rose at just a 1 percent rate in the second quarter, a mere shadow of the robust 4.1 percent first-quarter gain and the slowest increase since 2001, when the economy was in recession.

Big energy price hikes were one factor that hit consumer spending in the spring, analysts said.

Friday's data showed 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, matching the first-quarter's pace.

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.
Fed officials have expressed concern over the extent to which prices have surged this year, but said they should be able to move borrowing costs higher at a "measured" pace, in part because the unemployment rate remains relatively high.

Economist said the slowing in so-called core inflation bolstered 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.

GOODBYE SOFT PATCH

Fed Chairman Alan Greenspan told Congress last week a June soft patch in the economy would be temporary. "There is no real underlying evidence of any cumulative weakness here," he said.

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.

An index showing consumers' moods have brightened a bit this month suggested 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. (Additional reporting by Andrea Hopkins in Washington, Kyle Peterson in Chicago and Wayne Cole in New York)

Mortgage Rates News, Mortgage News, Financial News