GDP Growth Slows in Second Quarter

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August 30, 2004 -- The U.S. economy expanded at a slower pace in the second quarter than originally estimated thanks mostly to a larger than expected trade deficit, according to a new report from the Commerce Department.

Gross domestic product, the value of all goods and services produced within a country, grew at a 2.8 percent annual rate, representing the slowest expansion since the first quarter of 2003. The Commerce Department had first reported 3 percent growth for the quarter last month. The economy grew at a very strong 4.5 percent rate in the first quarter. The report noted that the falloff was largely due to a slowdown in consumer spending, especially for food and clothing.

The revision was in line with economists' expectations. Analysts had cut their forecasts after a record $55.8 billion trade deficit for June was reported, which was significantly higher than the estimate used in the first GDP report.

In a sign that businesses expect more robust consumption in the third quarter, inventories grew by $57.7 billion, after an increase of $40 billion in the first quarter and only $8.6 billion in the fourth quarter of 2003.

The report also showed that corporate profits were essentially flat, edging up 0.1 percent, the smallest increase since the first quarter of 2003.

The core price index for consumer spending, which strips out volatile energy and food prices and is a closely watched indicator by Federal Reserve Chairman Alan Greenspan, advanced at just a 1.7 percent annual rate in the second quarter, down from the initial 1.8 percent estimate. Prices rose by 3.2 percent overall, spurred on by the run-up in oil prices.

Matt Quinn

Matt Quinn contributes to the Wall Street Journal's corporate finance blog. He has also written extensively about banking and corporate finance for publications including Inc., American Banker, and Financial Week. He lives in Brooklyn, New York.