Washington, DC, July 28, 2006--The economy slowed in the second quarter, growing at a real 2.5% annual rate after a torrid 5.6% pace in the first quarter, the Commerce Department reported Friday.
Consumer spending weakened in the April through June period, residential investment fell further and business investment eased to the slowest growth in more than two years. Investments in business equipment and software declined for the first time in three years. Inventory accumulation and trade added to gross domestic product in the quarter.
Real final sales increased 2.1% annualized, down from 5.6% in the first quarter. Final sales to domestic purchasers increased 1.6%
Core consumer prices rose 2.9% annualized, the fastest pace in 12 years, keeping the pressure on the Federal Reserve to stay on top of inflation. Core consumer prices have risen 2.3% in the past year, the fastest growth since 1995.
The GDP price index, which covers all prices in the economy, increased 3.3% for the third straight quarter. Consumer prices including food and energy increased at a 4.1% pace.
The 2.5% real growth was weaker than the 3.1% gain expected by economists surveyed by MarketWatch. The economy has grown 3.5% in the past four quarters.
In nominal terms, the economy grew 5.8% to an annual rate of $13.19 trillion.
Growth was also revised slightly lower in 2003, 2004 and 2005, as part of the government's annual benchmark revisions that incorporate better data that are available only with a lag.
Real GDP averaged 3.2% in the three years, down from 3.5% previously. In 2005, the economy grew 3.2%, rather than the 3.5% previously reported.
The slowdown in GDP is welcome news at the Federal Reserve, which is trying to slow the economy to its long-term speed limit. Growth beyond the underlying productivity of the economy can fuel inflationary pressures, the Fed fears.
For the third quarter, economists are forecasting 3.1% growth, figuring that the slowdown in housing and high energy prices will continue to constrain consumer spending.
Over time, a slowdown in growth should bring inflation back down to acceptable levels. The Fed's recent forecast sees core inflation above the 2% comfort zone through 2007.
Financial markets expect the Fed to pause in August after 17 straight interest rate hikes. But economists are not so certain, with a slight majority expecting another quarter percentage point increase to 5.50%.
Real disposable incomes increased at a 1% annual rate. The personal savings rate fell to negative 1.5% from negative 1%. It was the fifth consecutive quarter of negative savings.
Consumer spending increased 2.5% after 4.8% gain in the first quarter. Spending on durable goods fell 0.5%, spending on nondurable goods rose 1.7% and spending on services increased 3.5%, the biggest gain in two years. Consumer spending contributed 2.7 percentage points to growth
Residential investment fell 6.3%, after falling 0.3% in the first quarter. Residential investment subtracted 0.4 percentage points from growth.
Business investment increased 2.7%, the lowest since the first quarter of 2004, contributing 0.3 percentage points to growth. Investment in structures rose 12.7%, the most in three years.
Investments in equipment and software fell 1% after a 15.6% increase in the first quarter. It's the first decline in three years.
Changes in inventories added 0.4 percentage points to growth.
Exports increased 3.3%, while imports grew 0.2%. Net exports added 0.3 percentage points to growth.
Government spending increased 0.6%. Federal spending fell 3.4%, including a 1% drop in defense spending. State and local government spending rose 3%. Government spending contributed 0.1 percentage point to growth
