Trade deficit takes toll on economy, slows growth rate

The Associated Press

WASHINGTON -- The economy, weighed down by a bloated trade deficit, grew at a slower pace in the first quarter of the year. The 3.9 percent rate suggested a still-sturdy recovery but raised questions about its strength in the months ahead.

The new reading on the gross domestic product, issued Friday by the Commerce Department, wasn't as strong as the 4.4 percent growth rate previously estimated for the January-to March quarter. It also was slightly slower than the 4.1 percent pace of the final quarter of 2003.

The GDP measures the value of all goods and services produced within the United States.

A main culprit to the downward revision was the yawning trade deficit. That shaved 0.7 percentage point off the first-quarter GDP, which was twice as much as estimated a month ago. Consumers also spent more modestly, and businesses didn't boost spending to buy equipment and to build inventories as much as previously thought.

The 3.9 percent growth rate, while the slowest pace since the second quarter of 2003, was still considered healthy, economists said.

"This is a little bit less momentum than we thought, particularly on the business side," said Bill Cheney, chief economist at MFC Global Investment Management. "But in the scheme of things, it's a decent rate of growth."

In other economic news, sales of previously owned homes climbed in May to a record annual rate of 6.80 million units, a 2.6 percent increase from April's level, the National Association of Realtors reported. Even with higher mortgage rates, home sales are expected to set records for all of 2004, economists said.

On Wall Street, though, the Dow Jones industrials lost 71.97 points to close at 10,371.84.

Estimates for economic growth in the April-to-June quarter ranged from a rate of 3.5 percent to just more than 4.5 percent. Even on the low end of that scale, the rate would be sufficient to generate jobs, analysts said.

Growth would be stronger if not for the expectation that higher energy prices will crimp consumer and business spending, they said. Some economists said the lower reading on first-quarter GDP raised questions about business investment and the nation's trade picture, factors that can affect the vigor of the economy in the months ahead.

"It doesn't look like investment spending will be all that great in the second half of this year," said Richard Yamarone, economist at Argus Research Corp. "I think corporate chieftains are a little reluctant to invest."

Mark Zandi, chief economist at Economy.com, said he was forecasting second-quarter GDP at around a 5 percent growth rate; in light of the first quarter's downward revision, however, he believes the rate will be closer to 4.5 percent.

Still, with the economy growing solidly, analysts widely expect the Federal Reserve to boost short-term interest rates for the first time in four years when they meet next week. The Fed's key rate is at a 46-year low of 1 percent. Most economists are forecasting an increase of one-quarter percentage point.

While politicians often don't like the prospects of higher interest rates, they also want the economy to be kept on an even keel, with low inflation.

An inflation gauge tied to the GDP report showed that core prices, which exclude food and energy, rose at a 2 percent rate in the first quarter, up from a 1.2 percent pace in the fourth quarter. That suggests that inflation, while still low by historical standards, clearly is on the rise.

President Bush and Democratic presidential candidate John Kerry, trying to woo voters, have sparred over economic, employment and trade issues. Although the jobs climate is improving, payroll jobs are still down by 1.2 million from where they stood when Bush took office in January 2001.

Kerry points to that as evidence that Bush's economic policies aren't working. But Bush cites a string of monthly job gains as evidence that they are. He credits his tax cuts as a major reason for the economy's rebound.

In the GDP report, consumer spending in the first quarter rose at a 3.8 percent annual rate. That was down slightly from a 3.9 percent growth rate previously estimated for the quarter but up from a 3.2 percent pace seen in the fourth quarter. Consumers cut back on big-ticket purchases, such as cars and appliances, in the first quarter.

Businesses boosted spending on equipment and software in the first quarter at a rate of 9.2 percent. That was down from a previous estimate for the quarter and slower than the 14.9 percent growth rate in the fourth quarter.

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On the Net

Commerce Department: www.commerce.gov/