Growth of economy in second quarter slower than first estimate

WASHINGTON -- Weighed down by high energy prices, the economy was even more sluggish than initially believed during the second quarter. But Federal Reserve policy-makers believe the pace will pick up in coming months, something President Bush is counting on as the election approaches.

The Commerce Department reported Friday that gross domestic product grew at a 2.8 percent annual rate in the April-to-June quarter, down from an earlier estimate of a 3 percent pace. The new GDP reading -- the smallest gain in just over a year -- indicated the economy slowed considerably compared with the brisk 4.5 percent growth rate in the first quarter of 2004.

"We're no longer sprinting, but we are not running out of wind either," said Richard Yamarone, economist at Argus Research Corp.

Gross domestic product measures the value of all goods and services produced within the United States and is considered the broadest barometer of the economy's fitness.

The new figure was better than the 2.7 percent rate economists were expecting, but it still provided fresh evidence of the "soft patch" that Federal Reserve chairman Alan Greenspan said the economy had hit in June.

Greenspan and his Fed colleagues, in boosting short-term interest rates Aug. 10, however, had said the economy appeared "poised to resume a stronger pace of expansion" in the months ahead.

Private economists believe the economy is gaining momentum in the current July-to-September quarter, with growth rate estimates ranging from 3 percent to 4 percent. The government's first estimate of third-quarter GDP will be released Oct. 29 -- just days before the Nov. 2 elections.

Although economists believe the Fed will raise interest rates for a third time this year on Sept. 21, they said much hinges on the August employment report, to be issued next week.

Consumers, whose spending accounts for roughly two-thirds of all economic activity, became a major factor behind the quarter's overall slowdown as spending increased at an annual rate of 1.6 percent, down from 4.1 percent rate in the first quarter.

The new second-quarter estimate, however, marked a slight improvement from the 1 percent growth rate first estimated. Spending on big-ticket goods, such as cars and appliances, was flat in the second quarter, compared with a decline previously reported.

"Car sales bounced back in July. Oil prices are moderating. So consumer spending should pick up in the coming quarters," said Scott Brown, chief economist at Raymond James.