Economy slows as spending falters

The U.S. economy unexpectedly slammed on the brakes in the spring, growing at an annual rate of just 3 percent, largely because of a sharp drop in consumer spending, the U.S. Department of Commerce said yesterday.

The abrupt slowdown provides material for sharpened political debate as the presidential campaign shifts into overdrive. The 1 percent growth in consumer spending from April to June was the weakest since the 2001 downturn.


"It's disappointing, especially considering the fact that we're still coming out of the recession, we still have a lot of excess capacity in the labor market," said Scott J. Brown, chief economist for Raymond James & Associates Inc., an investment firm in St. Petersburg, Fla.

Economic expansion had been much better earlier, especially last summer, when the gross domestic product jumped 7.4 percent.


Most economists expected to see a 3.8 percent increase from April through June, so the slower growth came as a surprise.

"I'm concerned that going out over the next several months, we're going to have poor employment growth," said Peter Morici, a professor at the Robert H. Smith School of Business at the University of Maryland. "You can't generate a lot of jobs at 3 percent growth."

Still, the first three months of the year were better than the government at first thought. The Commerce Department revised its growth estimate for the quarter, saying the economy grew 4.5 percent, rather than the 4.2 percent that had been originally estimated.

And there was a piece of hopeful information hidden in the dour spring numbers: Business spending on new buildings and equipment leaped 8.9 percent, compared with a 4.2 percent growth rate at the beginning of the year.

"The economic baton, I think, is passing from consumers to businesses," said Sung Won Sohn, chief economist at Wells Fargo & Co. "Business confidence is trending up, cash is piling up, the outlook for future demand is generally healthy."

Markets close up

Investors apparently saw both sides of the picture, pushing the stock market down and then back up to finish slightly ahead yesterday. The Dow Jones industrial average closed at 10,139.71, up 10.47 points. The Nasdaq composite index was up 6.3 points, finishing at 1,887.36, and the Standard & Poor's 500 index was up 1.29 points, to 1,101.72.

The economy has turned into a key issue in the closely fought presidential election, and the variety of recent financial information has provided rhetorical ammunition to both President Bush and John Kerry, his Democratic challenger.


Business hiring had kicked into high gear earlier this year, creating more than 900,000 jobs between March and May. But companies slowed their payroll expansion drastically in June.

Consumer confidence rose to a two-year high this month, but yesterday the White House projected that the deficit will balloon to a record $445 billion in the current fiscal year, compared with last year's $375 billion.

And the Commerce Department revised its economic growth numbers yesterday to show that the 2001 recession was slightly milder than it thought - some might argue it wasn't a recession at all - but the recovery wasn't quite as good.

Bush mentioned gross domestic product in a speech yesterday but reached further backward to concentrate on the positive.

"Our economy since last summer has grown at a rate as fast as any in nearly 20 years," he told supporters at Southwest Missouri State University.

Economists say the economic picture that emerges in the very near future could determine the election results. A Gallup poll last week showed both men in a dead heat.


"It's typical that voters vote their pocketbooks, and they vote their pocketbooks in relation to what's happening now, which means July, August and September are very critical," said James F. Smith, a finance professor at the Kenan-Flagler Business School at the University of North Carolina.

In the spring, those pocketbooks were shut pretty tight.

The 1 percent growth in consumer spending compared poorly with the 4.1 percent increase in the first three months of the year. That hit auto dealers particularly hard last month, their worst June in recent years.

"Clearly, consumers were scared off of spending by either high oil prices or some of the news out of Iraq, or both," said Gina Martin, a Wachovia economist. "But news so far for July tells us that a lot of June's softness was a one-month dip. ... I think we're going back into higher-trend growth for the second half of the year."

The Commerce Department said wages and salaries grew 6.6 percent from March to May, compared with 4.8 percent the same time last year, so she expects good back-to-school sales.

Catch-up activity


Martin was also encouraged to see that business inventories continued to swell, while equipment and software spending jumped 10 percent.

That's a bit of catch-up, she said, because businesses were slow to spend as the economy staggered out of the recession. But she suspects they're also making some 2005 purchases early to take advantage of tax write-offs that will disappear at the end of the year.

Morici is more concerned about the drop in consumer spending, which he thinks is a sign of longer-lasting difficulties - higher gas prices, more debt, the end of the refinancing boom in housing, the weakening influence of the Bush tax cut.

If the economy isn't growing as fast as everyone expected, he said, that presents a dilemma for the Federal Reserve, which has been signaling that it will slowly increase interest rates to deal with rising inflation.

"There is a real danger that the Fed will jam on the brake too hard and tip the economy into a recession as we go into 2005," Morici said.

Smith, the University of North Carolina professor, is much more bullish. He expects the economy to grow 6 percent from July to September.


"Business fixed investment is very strong," he said of spring. "I think that's incredibly significant because that's the debate - is the expansion going to last, is it self-supporting - and that very strong business fixed investment says, absolutely."