Economy logs its slowest growth in two years

Friday, April 29, 2005

WASHINGTON -- Cramped by high energy prices, consumers and businesses tightened their belts in the first quarter, causing the economy to log its slowest growth in two years.

That's raising new questions about the nation's economic strength and the prospects for better job creation in the months ahead. Stocks slid.

The broadest measure of the country's economic health, gross domestic product rose at an annual rate of 3.1 percent in the January-to-March period, down from a 3.8 percent pace in the prior quarter, the Commerce Department reported Thursday.

The first-quarter GDP reading was the most sluggish since the first quarter of 2003, when the economy limped ahead at a 1.9 percent rate as a nervous country hunkered down in advance of the Iraq war. GDP measures the value of all goods and services produced within the United States.

"The economy hit a pothole in early 2005," said Mark Zandi,'s chief economist. "Higher energy prices have sapped a lot of the economy's momentum." Consumers increased their spending at a 3.5 percent rate in the first quarter, the slowest since the second quarter of 2004. Their spending on cars and other big-ticket goods was flat.

Rattling investors

Businesses spending on equipment and software, meanwhile, rose at a 6.9 percent rate, only a fraction of the hot 18.4 percent growth rate in the fourth quarter. Investment in new plants and other buildings fell.

On Wall Street, the latest GDP report rattled investors. The Dow Jones industrials tumbled 128.43 points to close at 10,070.37.

Oil prices soared into record high territory in March and hit a new peak of $57.27 a barrel at the beginning of April -- straining household and business budgets. Prices have since retreated and now hover above $51 a barrel.

Still, the energy situation poses an economic and political thorn for President Bush. An Associated Press-AOL poll found that 62 percent of those surveyed disapprove of Bush's handling of the energy problem.

Just a few weeks ago, economists were predicting the economy would expand at a pace of 4 percent or better in the first quarter. But they lowered the forecasts to a 3.5 percent growth rate as a spate of recent economic reports suggested the economy had hit another "soft patch."

Those are the words Federal Reserve chairman Alan Greenspan used last spring when economic growth slowed abruptly.

Economists also are lowering their estimates for growth in the current April-to-June quarter -- to around a 3 percent rate -- or possibly less.

For now, economists believe the bump the economy is encountering is temporary -- not a sign of slide into recession. But it's dashing economists' hopes that businesses might ramp up hiring in the coming months. If economic growth stays in the 3 percent range, the already uneven labor market recovery will only plod ahead, they said.

"It is not good enough for making any real progress," said Ken Mayland, chief economist at ClearView Economics.

Commerce secretary Carlos Gutierrez said the economy is on a "steady" path of expansion but acknowledged, "There is still more work to do."

Employers added just 110,000 new jobs in March, the fewest in eight months. The employment report for April will be released by the government next week. Job gains may be only modestly higher, some analysts said.

Businesses, coping with rising costs, are trying to keep work forces lean. New claims for unemployment benefits climbed last week by 21,000 to 320,000, the Labor Department said.

On the inflation front, a gauge tied to the GDP report showed prices -- excluding food and energy -- rising at a rate of 2.2 percent in the first quarter. That was up from a 1.7 percent rate in the previous quarter and marked the fastest pace since the final quarter of 2001.

To combat inflation, Fed policy-makers are expected to raise short-term interest rates to 3 percent, a one-quarter percentage point boost, at their meeting on Tuesday, May 3. It would be the eighth increase of that size since last June.

The Fed probably will stay on its path of modest hikes for much of this year unless growth slows even more than anticipated, economists now believe.

Economists said they are not worried the economy may be heading toward stagflation, a worrisome mix of tepid economic growth, high unemployment and stubborn inflation.

The nation's bloated trade deficit -- another political headache for Bush -- also weighed on economic growth in the first quarter. The deficit shaved 1.49 percentage points off of GDP. Imports rose twice as fast as exports.

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