Thursday, June 28, 2007

US growth at weakest pace in four years

US growth at weakest pace in four years
By Daniel Pimlott in New York
Copyright The Financial Times Limited 2007
Published: June 28 2007 15:19 | Last updated: June 28 2007 15:19

The US economy grew at just 0.7 per cent in the first three months of this year, its worst performance in four years, as businesses sold off inventories and as the slump in housing hit a low point, according to final government estimates.

Although marginally stronger than the 0.6 per cent rate that the US Department of Commerce had previously estimated, the new gross domestic product figure dropped from 2.5 per cent growth in the final quarter of last year.

US economic growth was expected to be higher in the quarter, but many economists, as well as the Federal Reserve, have predicted a pick up in the economy later this year.

Forecasts for second quarter growth are largely in the range of 3-4 per cent, even though the housing downturn shows no sign of an imminent end.

The most significant changes to the data from earlier growth estimates included revisions to consumer spending estimates that raised worries over inflation.

Personal consumption spending excluding food and energy, a key measure of prices from the Fed’s perspective, was revised up to an annualised 2.4 per cent level of growth from a previous estimate of 2.2 per cent.

This is significant because it makes it less likely that data on personal income and spending, due out on Friday, will fall within the Fed policymakers’ preferred range of 1 to 2 per cent. Economists had been predicting that the price measure rose 1.9 percent in the year until May, but may now boost their forecasts. A figure falling above 2 per cent might strengthen the Fed’s resolve to keep inflation under control and hence reduce further the chance of rate cuts.

“The risks to the inflation outlook just took a long stride in the wrong direction,” said Drew Matus, an economist at Lehman Brothers. “We had already anticipated that the Fed would retain its elevated language and keep its inflation bias; this lends further support to that view.”

The Fed has said that inflation remains the greatest threat to US growth. Fed officials will announce their latest decision on interest rates on Thursday. They are widely expected to keep rates on hold at 5.25 per cent.

Business inventories were drawn down in the first quarter at a $4.2bn annual rate, slightly less than than the earlier estimate of $4.5bn, but still enought to help hold down growth.

Stocks fell after the report, while yields on US Treasury bonds rose on inflation concerns raised by the data.


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