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Economic growth weakest in over four years

The economy limped ahead at just a 0.7 percent pace in the first quarter, the slowest in more than four years, as some businesses clamped down on spending given uncertainties about the severity of the housing slump.
/ Source: The Associated Press

The economy limped ahead at just a 0.7 percent pace in the first quarter, the slowest in more than four years, as some businesses clamped down on spending given uncertainties about the severity of the housing slump.

The Commerce Department’s new reading on gross domestic product for the January-to-March period, released Thursday, was a slight upgrade from the 0.6 percent growth rate estimated a month ago. But it still fell short of economists’ forecasts for a 0.8 percent pace and may turn out to be the weakest point for the economy this year.

“Companies were really watching their cash,” said Oscar Gonzalez, economist at John Hancock Financial Services.

Gross domestic product measures the value of all goods and services produced in the United States. It is considered the best barometer of the country’s economic standing. Although businesses turned cautious, consumer spending remained sturdy, preventing the economy from stalling out.

Even though the economy slowed in the first quarter, an inflation gauge picked up speed.

The inflation gauge tied to the GDP report and closely watched by the Federal Reserve showed that core prices — excluding food and energy — rose at a rate of 2.4 percent in the first quarter. That was higher than previously estimated and faster than the 1.8 percent pace in the fourth quarter.

Wrapping up a two-day meeting Thursday, the Fed repeated its belief that the biggest danger to the economy is if inflation doesn’t recede as expected. Still, the Fed held a key interest rate steady at 5.25 percent, extending a yearlong period of stability.

In other economic news, fewer people signed up for unemployment insurance last week, a sign the national job climate remains healthy. The Labor Department reported that new applications for jobless benefits dropped by 13,000 to 313,000 last week.

The economy’s feeble 0.7 percent growth rate marked a significant loss of momentum from the 2.5 percent pace logged in the final quarter of last year. For nearly a year, the economy has been enduring a stretch of subpar economic growth mostly blamed on the housing slump.

However, Federal Reserve Chairman Ben Bernanke has said other forces that figured prominently into the first-quarter’s anemic performance — including a bloated trade deficit, business cutbacks in inventory investment and weak federal defense spending — “seem likely to be at least partially reversed in the near term.”

There have been signs in more current economic reports that the economy is emerging from its nearly yearlong sluggish spell. Bernanke and his central bank colleagues said Thursday that they expect the economy to log moderate growth in coming quarters.

Growth in the April-to-June quarter could clock in anywhere from a 2.3 percent to better than a 3 percent pace, analysts said.

Economists are anticipating the bounce back even though they expect the housing market to continue to sour.

The housing market nose-dived last year after a five-year boom.

Investment in home building was slashed by 15.8 percent, on an annualized basis, in the first quarter. That was a deeper cut than estimated a month ago but wasn’t as severe as the 19.8 percent annualized drop seen in the final quarter of last year. Economists predict there will be more pain ahead.

Facing uncertainties about the economy, businesses cut inventory investment as they tried to make sure unsold stocks didn’t get out of line with customer demand. That lopped off nearly a percentage point from first quarter GDP. The trade deficit also weighed on GDP in the first quarter, though slightly less so than previously estimated. That was the main reason the first quarter was upgraded to a 0.7 percent growth rate from the 0.6 percent pace reported a month ago.

Cuts in federal spending also contributed to the weak first-quarter showing.

As businesses tightened the belt, their profits gained ground.

One measure showed after-tax profits rising 1.7 percent in the first quarter. That was better than estimated a month ago and was an improvement from the 0.8 percent rise logged in the fourth quarter.

Consumers pretty much carried the economy in the first quarter. And consumer spending grew at a brisk 4.2 percent pace for the second quarter in a row.

One reason consumers have remained resilient is because the job climate has stayed healthy despite the economic slowdown. The unemployment rate is at a relatively low 4.5 percent.

Even so, the public is giving President Bush low marks for his economic stewardship. Only 37 percent approve of his handling of the economy, tying a record low set in November 2005, according to an AP-Ipsos poll.

In another report, the United States continued to be the world’s largest debtor country, with foreigners in 2006 owning $2.54 trillion more in U.S. assets, such as stocks, bonds and real estate, than Americans owned in foreign assets. In 2005, the investment gap totaled $2.24 trillion, the Commerce Department said.