Runaway oil prices, which briefly punched to an all-time high in New York, are pounding the US economy just 10 weeks ahead of presidential elections, analysts warned.
New York's main crude oil contract eased a little Friday as a stand-off with Shiite Muslim militia in the Iraqi city of Najaf appeared on the verge of being resolved.
After spiking at an all-time high 49.40 dollars a barrel, the benchmark light sweet crude contract for September delivery closed at 47.86 dollars, down 84 cents on the day.
Nevertheless, crude oil prices are up 47 percent since the start of this year.
"The combination of the run-up in oil, heightened fears of terrorism, unhappiness with the presidential election and worries about a wide range of imbalances in the economy (trade, housing and consumer debt) has drained some of the 'mojo' out of the economy," said Lehman Brothers chief US economist Ethan Harris.
"A negative dynamic has developed between the economy, the stock market and corporate confidence in the outlook."
While short of a disaster, it was "troubling" that the economy had hit a soft patch just when momentum should be growing, he said.
Lehman Brothers cut its forecast for economic growth in the third quarter of this year to 3.3 percent from 3.7 percent.
Such a sluggish performance could be crucial in the tight race for the November 2 presidential elections, with Democratic challenger John Kerry accusing President George W. Bush of economic mismanagement.
The oil price surge had a "noticeable impact" on consumer spending, the lifeblood of the economy, accounting for two-thirds of activity, Wells Fargo Banks chief economist Sung Won Sohn said.
"While the US consumer has weathered many economic shocks from terror attacks, stock debacles, and recession over the past several years, it is becoming increasingly difficult for consumers to lead economic growth higher," he said.
Consumer spending fell 0.7 percent in June, the steepest plunge since the September 11, 2001 terrorist attacks.
Federal Reserve chairman Alan Greenspan said last month the lull in consumer spending should be "short-lived," expressing confidence in a rebound in the economy after the "transitory" energy price spike passes.
"Many, including Chairman Greenspan, have taken to heart the notion that future declines in energy prices will help ease inflationary pressure and better job growth will reinvigorate real incomes, but as yet declines in initial jobless claims have not been confirmed by stronger payroll numbers, and the terror premium in oil prices is not likely to go away soon," Sohn said.
US employers hired a meagre 32,000 extra workers in July, latest government figures showed, crushing expectations of a gain of at least 240,000 after a sluggish June.
"Stronger capital spending by businesses is expected to take up some of the slack of slower consumer spending growth," Sohn said.
"But with consumer spending moderating, the fastest growth of the recovery may already be behind us, and the probability that the economic soft-patch may turn into a brier-patch has increased."
Adjusted for inflation, oil prices are well below the levels reached in the 1970s oil shock.