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2nd Qtr. Economic Growth Slows

The U.S. economy grew at an annual rate of just 3 percent in the spring, a dramatic slowdown from the rapid pace of the past year, as consumer spending fell to the weakest rate since the last recession, the government reported Friday.

The Commerce Department said that the gross domestic product, the country's total output of goods and services, slowed sharply in the April-June quarter from a 4.5 percent growth rate in the first three months of the year.

The size of the slowdown caught economists by surprise.
Many were looking for stronger second quarter growth of 3.6 percent, according to a survey conducted by CBS MarketWatch.

Even that would have been a sharp deceleration for an economy that had been growing at a 5.4 percent annual rate through the year ending in March.

It raised the issue of whether the economy, which Federal Reserve Chairman Alan Greenspan said last week had encountered a "soft patch" in June, could be in danger of seeing growth falter even more in coming quarters.

In one piece of good news, inflation pressures eased with a key GDP inflation gauge that excludes energy and food rising at an annual rate of just 1.8 percent in the second quarter, down from a 2.1 percent increase in the first quarter.

Tim McGee, chief economist at U.S. Trust Corp., tells MarketWatch the slowdown in consumer spending was due to "a lot one-off factors that depressed spending in June" and spending should move higher in the third quarter.

Real disposable income rose 3.9 percent year-on-year in the second quarter, McGee said.

"It looks like consumers have more than enough income to keep spending and cover higher prices," he said.