2.9% growth rate signals economy slowing after a peppy first quarter
Posted on Thursday, August 31, 2006
WASHINGTON — The economy grew at a better than estimated pace in the spring, but nowhere near the brisk tempo logged in the winter, another sign of slowing business growth.
The latest snapshot that the Commerce Department provided of the economy Wednesday showed that economic activity grew at just a 2. 9 percent annual rate during the April-to-June quarter. Although that was a slight improvement over the government’s first estimate of a 2. 5 percent growth rate, it nevertheless provided strong evidence of just how much momentum the economy has lost since last winter. In the January-to-March quarter, the economy had grown at a brisk 5. 6 percent pace, the
1 fastest spurt in 2 / 2 years. The main culprits in the spring slowdown: belt-tightening by consumers and businesses, the fallout from high energy prices and a cooling of the once-sizzling housing market.
Economic growth in the second half of this year is expected to stay subdued, at a pace of around 2. 5 percent to 3 percent, according to some analysts’ projections. Economists hope the soft spell doesn’t morph into a more dangerous slowdown.
The 2. 9 percent growth rate logged in the second quarter was the slowest since the final quarter of 2005, when the economy, reeling from fallout from the Gulf Coast hurricanes, expanded at a pace of only 1. 8 percent.
Even though the economy slowed, inflation moved higher.
An inflation gauge closely watched by the Federal Reserve showed that core prices — excluding food and energy — advanced at a rate of 2. 8 percent in the second quarter, up from a 2. 1 percent pace in the first quarter.
The second quarter’s increase matched that seen in the first quarter of 2001 and hasn’t been higher since the third quarter of 1994 when this inflation measure rose at a 3. 2 percent pace.
With the economy slowing, the Federal Reserve earlier this month halted a rate-raising campaign that lasted for more than two years. The decision was a “close call,” minutes of the meeting revealed.
“We are slowing down, but [the gross domestic product number ] may help us keep it in perspective,” Federal Reserve Bank of Dallas President Richard Fisher said Wednesday after a speech in Dallas. “We could not have kept growing at the rate we were growing in the first quarter.”
He called the Wednesday figures “pretty healthy,” after “that tremendous boost in the first quarter.”
Stephen Cecchetti, an economics professor at Brandeis University in Waltham, Mass., said economic growth “could easily fall from where it is” over the next year.
“We’re looking at a dramatic risk for a slowdown,” Cecchetti said. “And that’s what’s really holding the Fed back at this point.”
Some economists believe rates will be left alone again when the Fed meets next on Sept. 20. Others, however, think a rate increase will be needed to keep inflation in check.
Fed policymakers haven’t ruled out another rate increase but are hoping that slower economic growth will eventually lessen inflation pressures.
Changes in the federal funds rate are the Fed’s primary lever for influencing the economy. The Fed’s benchmark rate directly influences other shortterm rates, such as the prime rate and credit card rates.
However, the Fed’s bigger influence on the economy comes from the effects its monetary policy has on long-term borrowing costs, such as rates on mortgages and corporate debt. Those interest rates affect the prices of stocks, bonds, real estate and other assets.
The Fed will meet twice — in September and again in October — before the November elections. Perceptions of the economy’s health may influence voter choices at the polls.
“Economic conditions are the most enduring variable in congressional elections,” said Ross Baker, a political science professor at Rutgers University.
“Wars come and go. Energy crises come and go. Environmental questions sometimes recede in the background and sometimes are prominent. But at all times, the state of the economy is important,” he said. “It is not just the numbers — it is how people feel about the economy. It is one of these breakfast table, visceral issues in which you got hundreds of millions of Americans thinking about whether they are better off or worse off than they have been.”
President Bush and his fellow Republicans believe Americans are mostly better off. Democratic rivals disagree.
Commerce Secretary Carlos Gutierrez said the president’s “strong track record on the economy has helped many more families live the American dream.”
Sen. Jack Reed, D-R. I., worried that a sharper economic slowdown could raise the U. S. unemployment rate, now at a five-month high of 4. 8 percent. “Economic growth is starting to slow even before most Americans have received any of the benefits of this recovery,” he said. Information for this article was contributed by Courtney Schlisserman of Bloomberg News.
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