Friday, April 27, 2007

U.S. economic growth slows to its weakest pace in 4 years

U.S. economic growth slows to its weakest pace in 4 years
Copyright by Reuters

WASHINGTON: Weaker exports and a steady slide in spending on homebuilding helped slow U.S. economic growth to its softest pace in four years during the first quarter, the Commerce Department reported on Friday.

Gross domestic product or GDP, which measures total goods and services output within U.S. borders, increased at a weaker-than-expected 1.3 percent annual rate in the three months from January through March.

That was a little more than half the fourth quarter's 2.5 percent rate and well below the 1.8 percent rate that Wall Street analysts had forecast GDP would expand. The last quarter when growth was weaker was in the first three months of 2003, when GDP expanded at a 1.2 percent rate.

Growth has been slowing since late last year under the impact of a hard-hit housing sector where rising defaults are taking a toll on the subprime lending sector and causing builders to scale back until inventories of completed but unsold homes are reduced.

Residential spending shrank by 17 percent in the first quarter following declines of 19.8 percent in the fourth quarter and 18.7 percent in the third quarter last year. It was the sixth straight quarter in which spending on residential construction contracted.

Treasury prices initially gained across the board on hopes that weaker growth might raise chances for lower official interest rates later this year but gave up most of the gains later because of concern about higher-than-forecast core prices in the GDP report.

Stock futures sank and the dollar's value fell to a record low against the euro, hurt by the possibility that U.S. interest rates might fall and so make the U.S. currency less attractive to hold than the euro.

Steve Barrow, a foreign exchange specialist with Bear Stearns in London, said the dollar was likely to remain under pressure out of concern about softening U.S. growth.

"You have a low GDP growth and a high deflator and that's the worst combination," Barron said. "The idea of stagflation will not be far from the market's mind."

The implicit deflator, one of several price measures within the GDP report, jumped at a four percent rate in the first quarter, move than double the prior quarter's 1.7 percent rate.

A price gauge favored by the Federal Reserve -- personal consumption expenditures excluding food and energy items -- increased at a 2.2 percent rate in the first quarter, slightly ahead of forecasts for a 2.1 percent advance.

That was up substantially from the fourth quarter's 1.8 percent rate and is likely to keep Fed policy-makers wary about the potential for a pickup in inflation.

But Pierre Ellis, a senior economist with Decision Economics Inc. in New York, said the GDP report's indication that consumers still were spending and the fact that growth was losing some steam could be helpful for policy-makers in the long run.

"The weakness in the total is actually a silver lining for the Fed because it reduces stress on resources without the number suggesting any fundamental new weakness in the economy," Ellis suggested.

The GDP report showed consumers increased spending in the first quarter at a 3.8 percent annual rate, down modestly from the 4.2 percent rate in the fourth quarter but a significant reservoir of strength since consumer spending accounts for the about two-thirds of national economic activity.

A second report, from the Labor Department, demonstrated corporate efforts to keep employee benefits damped, with overall employment costs rising a smaller-than-expected 0.8 percent in the first quarter.

That occurred despite a 1.1 percent gain in wages and salaries, the strongest since a 1.3 percent rise in the first quarter of 2001, as benefits costs edged up a scanty 0.1 percent, the least since a matching 0.1 percent rise in the first quarter of 1999.

The GDP report showed companies were wary about building up large inventories. Spending on inventories increased at a $14.8-billion rate in the first quarter, well down from the fourth quarter's $22.4 billion. It was the weakest pace of inventory addition since the third quarter of 2005, when companies drew them down at a $12.2-billion rate.

But business investment showed some signs of resilience, with spending up at a 2 percent rate in the first quarter, partly recovering from a 3.1 percent decline in the closing quarter of 2006.

Exports declined at a 1.2 percent rate in the first quarter, a sharp reversal from the fourth quarter's 10.6 percent advance. It was the first decline in exports since the second quarter of 2003 when they fell at a 1.7 percent rate.

1 Comments:

Blogger David Wozney said...

A "Federal Reserve Note" is not a U.S.A. dollar. In 1973, Public Law 93-110 defined the U.S.A. dollar as consisting of 1/42.2222 fine troy ounces of gold.

12:04 PM  

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