Updated from 8:50 a.m. EDTAmid soaring energy prices and fading tax stimulus, consumers tightened their purse strings in the second quarter, leaving gross domestic product well below economists' forecasts. Real GDP grew at a 3% annual pace in the second quarter, far short of economists' 3.7% estimate, as consumer spending increased at its weakest pace since the first quarter of 2001. Offsetting the disappointing news somewhat was an upward revision to first quarter GDP. The Commerce Department said the economy grew 4.5% in the first three months of the year, not 3.9% as originally reported. What's more, government revisions cast some doubt on whether the economy really experienced a recession in 2001. Investors often consider the GDP report as a backward-looking indicator, but it can offer clues about the future. "If you ended the quarter very soft, you have to dig your way back," said Steven Wieting, senior economist at Smith Barney. "We could have a very nice gain in consumption in July, but if June was down, you need a nice gain just to get back to flat." Ed McKelvey, senior economist at Goldman Sachs, said the report suggests there is some downside risk to his estimate of 3.5% growth for both the third and fourth quarters. "It depends on what we see about the consumption path," he said. Consumer spending rose at a sluggish 1% annual pace in the quarter, as oil prices jumped sharply and fiscal stimulus evaporated. Spending on durable goods fell 2.5%. Still, business investment rose 11.1% after a 4.5% gain in the first quarter and spending on equipment and software increased 10.0%. Economic growth has slowed since the third quarter of 2003, when GDP rose a revised 7.42%. In the fourth quarter, the economy grew a revised 4.2%. Meanwhile, inflation has crept higher. The GDP price deflator rose at a 3.2% pace in the three months ended June 30, up from 2.7% in the first quarter and 1.4% in the fourth quarter.
"The report offers a sobering account of the softening in economic activity," said Ashraf Laidi, analyst at MG Financial Group.
In a move that could potentially help the Bush administration, the Commerce Department cast some doubt on whether the economy experienced a recession in 2001. In the revised data, the economy fell at a 0.5% annual pace in the first quarter of 2001, then expanded by 1.2% in the second quarter before contracting 1.4% in the third. In the prior data, the economy fell in all three quarters.