Growth slows as energy costs rise
By Patrice Hill, The Washington Times --Jul. 31
Economic growth slowed abruptly to a 3 percent rate this spring as consumers pulled back on spending in the face of record-high energy prices, the Commerce Department reported yesterday.
The falloff in growth this spring from a robust 4.5 percent pace in the
winter quarter reflects the biggest energy shock to hit the U.S. economy since
early 2001, when jolting increases in energy prices helped trip the economy into
recession.
"Higher prices for oil and negative news from Iraq proved formidable
head winds for the economy," said Gina Martin, economist at Wachovia
Securities.
Auto dealers, who scaled back generous sales incentives during the quarter,
took the biggest blow from the consumer slowdown. Excluding drops in auto sales
and production, growth was more than 4 percent, the department said.
Still, the economy this year has proved far more resilient at absorbing a 40
percent rise in oil and gasoline prices and doubling of natural gas prices than
in previous episodes of skyrocketing energy prices.
Despite a retrenchment by consumers from a 4 percent pace of spending growth
in the first quarter to 1 percent last quarter, the high prices did not deter a
9 percent gain in spending by businesses, which took up the slack.
Also, exports soared at a 13.2 percent pace and housing investment took off
at a 15.4 percent rate as buyers raced to beat interest-rate increases
engineered by the Federal Reserve and lock in low mortgage rates.
The frenzy of home buying, and a boost in consumer confidence this month, has
many analysts predicting that consumers will return to the stores during the
summer quarter, if only to furnish and refurbish their new homes.
"The economy is well poised to resume a faster climb in the second
half," said Lynn Reaser, chief economist at Banc of America Capital
Management.
An improving employment outlook is lifting consumer confidence and likely
boosted auto sales this month, she said, while the near-record pace of home
sales shows consumers are still in a spending mood but are focused on long-term
investments.
Jerry Jasinowski, president of the National Association of Manufacturers,
said consumers this year passed the baton on to businesses and manufacturers,
who are now sustaining the recovery.
"Exports and business investment contributed to over 70 percent of GDP
[gross domestic product] growth in the second quarter," he said. "This
is particularly good news for manufacturers," who are "outpacing the
overall economy" this year.
Record-high oil prices still pose a threat to the economy, analysts say. For
one, they are the principal reason inflation doubled to a 3.3 percent pace in
the first half of the year, according to a measure of prices paid by consumers
in yesterday's report. Prices excluding energy are running closer to 2 percent.
Since the April-to-June period covered by the report, oil prices have surged
to new records in New York trading, with premium crude prices hitting a new high
of $43.80 a barrel yesterday on worries about disruptions in the supply of oil
from Russia.
Oil analysts say prices could climb even higher because fears of disruptions
in Russia and the Middle East have combined this year in a toxic mix with
dwindling supplies worldwide and burgeoning demand for oil in the United States
and Asia.
"We may have a new energy shock" as a result of the latest run-up
in prices, said Neal Soss, chief economist at Credit Suisse First Boston Corp.
While the economy has weathered prices in the $30-to-$40 range, Wachovia
analyst Jay Bryson said a price spike to $60 or above caused by disruptions in
supply could have a "devastating effect" on the U.S. and global
economies.
He estimated the current oil levels are slowing U.S. growth by about one
percentage point a year.
While the picture of the economy in yesterday's report is considered
important politically because it is the one consumers will carry with them into
the voting booths, neither President Bush nor his Democratic opponent, Sen. John
Kerry of Massachusetts, said much about it yesterday.
Peter Morici, a business professor at the University of Maryland, said
"the anemic growth indicates poor job creation ahead and bodes poorly for
the re-election prospects of President Bush."
He said the slow progress of the economy is likely to hurt Mr. Bush most in
battleground states such as Ohio and North Carolina, which were hit hard by
manufacturing layoffs.
Barker French, chief investment strategist for Brinker Capital, sees a more
mixed picture that provides "no edge for Bush." He expects the
downturn in consumer spending because of high oil prices to continue to keep the
economy "sputtering" through the elections.
Consumers have grown cautious because of the Iraq situation as well as the
cut in disposable incomes from high oil prices, he said.
"Americans are getting a daily dose of Iraq problems," he said.
"This drumbeat of news has a psychological effect on consumers."
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