GDP Growth Of 3% In Q2's "Soft Spot' Is Well Below Views; But Q1 Is Bumped To 4.5%; Higher gas prices took a toll on the consumer, but economy otherwise solid.(A)

Byline: JED GRAHAM

The economy grew at its slowest pace in more than a year last quarter amid a sharp deceleration in consumer spending.

GDP growth slowed to a 3.0% annual rate, down from the first quarter's upwardly revised 4.5% pace, the Commerce Department said Friday. Growth was the slowest since the first quarter of 2003, as consumer spending rose just 1%, the weakest gain in three years.

"This report clearly reflects higher energy prices, which temporarily kicked the stuffing out of big-ticket purchases," said Bob Gay, head of fixed income research at Commerzbank Securities. "If energy prices stop rising, the economy should work through this and revert to its natural momentum, which is quite strong."

That momentum was evident in other aspects of the GDP report. Nonresidential investment rose at an 8.9% pace in the quarter, up from 4.2% the prior quarter.

The gain was fueled by a 10% rise in spending on equipment and software, up from 8% in the first quarter, and a 5.2% rise in private construction outlays, reversing a 7.6% drop. Housing investment surged 15.4% after a 5% increase.

Exports rose 13.2% in the quarter after a 7.3% gain, while import growth decelerated to 9.3% from 10.6%. Private inventories increased $47.5 billion in the second quarter, up from gains of $40 billion in the first and $8.6 billion in the fourth.