The news that slower growth arrived in the second quarter is being greeted with a mixture of relief and foreboding. Many, including Fed officials, assume that slower US growth is here to stay and that it will quickly cap the cyclical rise in inflation. Those who are relieved assume that while growth won’t seriously falter, the Fed has reached the end of its tightening campaign and, in time-honored fashion, will at some point back away from monetary restraint — which could be good news for risky assets. In contrast, those who are pessimistic assume that the spring slowdown is the harbinger of something worse — possibly including a recession — that will force significant declines in interest rates and in risky asset prices.

I’m far less sure that a lasting slowdown has arrived and am confident that the economy’s resilience will help it weather shocks that might otherwise threaten a downturn. Indeed, we’d been anticipating a spring deceleration for some time, so the only issue was how dramatic it would be. More important, we continue to think that, while the forces depressing growth are unmistakable and a slowdown is coming, there are other factors sustaining still-hearty growth for now. One key reason: Courtesy of the annual recasting of the national income and product accounts for the past three years, the improvement in consumer income prospects that we thought was underway is now evident, lending strong support to consumer outlays.

Nonetheless, the Fed’s job just got tougher, considering the range of possible outcomes ahead. Even if we’re wrong and the economy fails to re-accelerate in the second half of 2006, the annual retrospective on the national accounts also implies that inflation fundamentals are slightly worse than we thought. Thus, while I think that the rise in inflation is cyclical, inflation risks are still moving higher. And while officials could still decide to pause at the FOMC meeting next week, in my view it’s premature to think that the Fed is finished tightening, much less that easing will soon be on the way. Here’s why and a consideration of the risks.

First, it’s important to diagnose the deceleration in economic activity that has just occurred. In my opinion, declining housing affordability, higher energy quotes, and the payback from a strong first quarter all depressed second-quarter growth. Courtesy of soaring home prices and rising interest rates, the slide in affordability has promoted a year-long decline in demand, and builders are now scrambling to cut housing construction to align it with sales and trim unwanted inventories. That scramble will probably intensify in coming months. The surge in gasoline and other energy prices drained some $65 billion (0.7% of disposable income) from consumer purchasing power over the second quarter. That hit to income alone would have been enough to cut spending growth in half following the 4.8% first-quarter spending surge. In addition, however, exceptionally warm January weather and the rebound in activity following last year’s hurricanes exaggerated growth in the winter at spring’s expense. Spring declines in business equipment and federal government spending — in turn representing paybacks from exceptional first-quarter strength — magnified the second-quarter deceleration. The upshot: There are fundamental reasons why growth slowed sharply in the spring. But there are also enough distortions in the data to question whether this deceleration is at least partly the product of a confluence of special factors or the start of a more lasting slowdown.

The answer, as I see it: Our case for moderately stronger second-half growth — which is now way out of consensus — is still intact. Most important, the vigorous gains in wage and salary income implied by booming tax collections are now more evident in the recasting of the official data. Despite surging energy quotes, real wage and salary income rose by 3.4% over the past year — a six-year high and eclipsing the growth in spending for the first time in six years. With the growth in non-wage income even stronger , just modest relief from energy price increases should unleash both stronger growth in consumer spending and increased thrift.