Wednesday, August 30, 2006

U.S. economy grows at a 2.9% pace in spring

Associated Press

Washington — The economy grew at a 2.9 per cent annual rate in the spring — better than first estimated but nowhere near the brisk pace logged in the winter, another sign of slowing business growth. Inflation marched higher.

The latest snapshot of economic activity, released by the Commerce Department Wednesday, showed that gross domestic product in the April-to-June quarter increased slightly more than the 2.5 per cent pace first reported a month ago. That upgrade mostly reflected an improvement in the country's trade picture and stronger inventory building by businesses.

The upward revision, though, didn't change the big picture of the economy: In the spring, it slowed sharply from the first quarter's 5.6 per cent pace, the strongest growth spurt in 2 1/2 years, as consumers and businesses tightened the belt.

Gross domestic product measures the value of all goods and services produced within the United States and is considered the best barometer of the country's economic standing.

The second-quarter's showing was slightly less than the 3 per cent pace that analysts were expecting.

Even though the economy lost momentum in the spring compared with the winter, 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 per cent in the second quarter, up from a 2.1 per cent 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 per cent 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.

The Fed meets next on Sept. 20 and there's uncertainty about its next move. Some economists believe rates will be left alone again, while others think a rate increase will be needed to keep inflation in check.

Fed policy-makers, concerned about inflation, are keeping the door open to a rate increase; but they are betting that inflation pressures will gradually lessen as economic growth moderates.

Oil prices, which hit a new record closing high of $77.03 a barrel in mid-July, have retreated and are hovering below $70 a barrel.

The average retail price of gasoline nationwide has fallen by nearly 20 cents over the past three weeks to $2.85 a gallon.

However, high energy prices forced consumers and businesses alike to tighten their belts in the second quarter, a big reason why the economy slowed so sharply from the prior quarter.

Consumer spending increased at a rate of 2.6 per cent, a tad better than first estimated for the second quarter but a steep deceleration from the first quarter's 4.8 per cent pace.

Businesses, meanwhile, cut spending on equipment and software at a 1.6 per cent pace, deeper than first estimated and a reversal from the 15.6 per cent growth rate of the first quarter.

Spending on home building was slashed at a 9.8 percent rate in the second quarter — a sharper cut than previously estimated and more evidence that the once highflying housing sector has lost altitude.

The 2.9 per cent 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 per cent.

Voters' perceptions of the economy's health may influence their choice at the polls in November.

President Bush has been touting his economic policies but is getting relatively low marks from the public for his economic stewardship.

Economic growth in the second half of this year is expected to be remain somewhat subdued at a pace of around 2.5 per cent to 3 per cent, according to some analysts' projections.

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