Spending Slowdown Hits Us Economy

The US economy lost pace in the second quarter amid a sharp slowdown in consumer spending, official figures showed today.

For the April-June period, gross domestic product (GDP) rose at a modest 3% annual pace following an upwardly revised 4.5% rate at the start of the year, the Commerce Department reported.

The extent of the slowdown caught most of Wall Street by surprise, with many economists having expected GDP growth of around 3.8%.

The figures will come as a disappointment to the Bush administration, with the White House banking on a strong economy to create plenty of jobs in the months before the presidential elections take place on November 2.

The Democratic presidential candidate, John Kerry, yesterday pointedly compared Mr Bush's economic record with that of his predecessor, Bill Clinton, during whose presidency 23 million jobs were created.

The slowdown in the second quarter stemmed from a moderation in consumer spending, which rose at an annual rate of just 1%. That was the smallest increase since a similar rise in the second quarter of 2001, when the economy was in the doldrums.

Offsetting the weakness in consumer spending, business investment and housing continued to race ahead during the quarter. Consumer spending, however, is critical, because it accounts for two-thirds of total US economic activity.

Many economists believe the slowdown in consumer demand will be temporary, pointing to strong job growth in recent months and rising consumer confidence that will provide support for a rebound in consumer spending in the months ahead.

The Federal Reserve, the US central bank, began raising interest rates on June 30, with its chairman, Alan Greenspan, indicating that a "measured" approach towards monetary policy could be expected as long as inflation remained quiescent.

On that score, the GDP report contained encouraging news. Inflation pressures eased, with a key GDP inflation gauge - excluding energy and food - rising at an annual rate of only 1.8% in the second quarter, down from a 2.1% increase in the first quarter.

"What really stands out in this report is that we're looking at a more pronounced than expected slowing of economic activity, mostly because of the shockingly small increase in consumer spending," John Lonski, the chief economist at Moody's Investors Service in New York, told Reuters.