WASHINGTON, Aug 29 (AFP) - Is the US economy in a transitory "soft patch" or sliding toward a downturn?
The most recent economic data, showing a 2.8 percent annual growth rate in the second quarter, left economists debating whether the world's largest economy is simply taking a breather or running out of steam.
The gross domestic product report, revised downward from an earlier estimate of 3.0 percent growth, showed a considerable weakening from the 4.5 percent pace in the first quarter.
The surge in oil prices represented a big part of the slowdown, but economists said US consumers have turned cautious in the face of high energy prices, geopolitical uncertainty and other factors.
"The reality is that the economy is slowing down as high oil prices bump against the sudden loss of fiscal and monetary stimulus," said David Rosenberg, chief North American economist at Merrill Lynch.
To make matters worse, Rosenberg said that a big chunk of economic growth is going into inventories, because sales are soft, making the outlook even gloomier. Rosenberg sees the sluggish trend continuing.
"We stick to our three percent real GDP growth call for the third quarter -- the consensus is still very close to four percent -- as the inventory-sales mix in the second quarter was not the sort of configuration that typically leads to a meaningful acceleration in the pace of economic activity," he said.
Federal Reserve Chairman Alan Greenspan did not address the current economic picture in his speech Friday, but he and other members of the central bank have suggested the current weakness is transitory and that conditions are improving.
"My sense is that the recent softness in the economy ... is more fleeting than fixed," Atlanta Fed President Jack Guynn said recently. "I expect momentum to resume."
But some economists are skeptical.
Morgan Stanley chief US economist Stephen Roach said the outlook is grim, with the Fed poised to keep raising interest rates while crude oil prices are more than 50 percent higher than they were a year ago.
"'Real' oil prices are now back to levels last seen in the late 1980s. If oil prices hold around present levels, this would qualify as a shock," Roach said.
"Shocks hurt most when they hit vulnerable economies," he added. "With current recoveries vulnerable in the US and in a US-centric global economy, the current oil shock could lead to recession in 2005."
Citibank's Steven Wieting said most economic forecasts over the past few months assumed oil prices around 38 dollars and would have to be revised lower if oil stays above that level.
He said the recent surge in prices left the economy statistically negative in the month of June.
"For both understandable and perhaps mysterious reasons, the US economy contracted in June, leaving activity levels in a 'statistical deficit' as the third quarter began," Wieting said.
"Accounting for the negative momentum created by the June declines, GDP in the current quarter will likely rise about 3.5 percent. A stronger fourth quarter is quite probable if the third quarter ends better than the second," he said.
Wells Fargo Bank chief economist Sung Won Sohn said the fact that oil pulled back from nearly 50 dollars a barrel will allow the US economy to breathe a sigh of relief.
"Lower oil prices should help sustain economic growth," Sohn said. "Consumers have income and confidence to maintain spending. The recent jump in car sales is encouraging. Even excluding car and gasoline sales, retail sales should be solid assuming employment rebounds."
Lehman Brothers economist Ethan Harris said the global economy was in reasonable shape and should be able to withstand the impact of high oil prices.
"The rise in oil prices is bad news for the global economy, putting upward pressure on inflation and downward pressure on growth," he said.
"However, unless there is a much larger rise in prices, or some of these health warning signs worsen substantially, we will continue to view the oil shock as a moderate setback for global growth rather than a signal of impending recession."