Associated Press
WASHINGTON — Economic growth in the U.S. slowed to a near crawl of 1.3 per cent in the first three months of 2007, the worst performance in four years. The main culprit: the housing slump.
The fresh reading on gross domestic product, released by the Commerce Department on Friday, was even weaker than the 2.5 per cent growth rate logged in the final three months of last year. The new figures underscored just how much momentum the economy has been losing as it copes with the strain of the troubled housing market, which has made some businesses more cautious in their spending.
The first-quarter GDP figure was the weakest since a 1.2 per cent pace registered in the opening quarter of 2003. GDP measures the value of all goods and services produced within the United States and is considered the best barometer of the country’s economic fitness.
The performance was even weaker than what economists expected; they had forecast a growth rate of 1.8 per cent.
Still, Federal Reserve Chairman Ben Bernanke and other economists don’t expect the economy to fall into a recession this year. Former Fed chief Alan Greenspan has put the odds at one in three, however.
Even though the economy slowed in the first quarter, inflation picked up — a development that will complicate the Fed’s work.
An inflation gauge tied to the GDP report and closely watched by the Fed showed that core prices — excluding food and energy — rose at a rate of 2.2 per cent in the first quarter, up from a 1.8 per cent pace in the fourth quarter. Another measure tracking all prices jumped by 3.4 per cent in the first quarter, compared to a 1.0 per cent decline, on an annualized basis in the fourth quarter.
Federal Reserve policy makers say the biggest danger to the economy is if inflation doesn’t recede as they currently predict.
The Federal Reserve hasn’t moved a key interest rate since August. Before that it had steadily lifted rates to ward off inflation. Many economists predict the Fed will continue to leave rates alone when it meets next month. The Fed’s goal is to slow the economy sufficiently to key inflation in check, but not so much as to provoke a recession.
In other economic news, employers’ costs to hire and retain workers grew by 0.8 per cent in the first quarter, down slightly from a 0.9 per cent increase in the fourth quarter, the U.S. Labor Department reported.
Wages and salaries went up 1.1 per cent, the fastest since 2001. Benefit costs, however, edged up 0.1 per cent, the slowest since the first quarter of 1999. The Fed keeps close tabs on labour costs for clues about inflation.
The reports come as President Bush continues to cope with mediocre ratings from the public on his economic stewardship, according to AP-Ipsos polls. Democrats, who have accused Bush of not doing enough to close the widening gap between high- and low-paid workers, are advocating a boost to the federal minimum wage and policies to help unions.
The biggest factor behind the first-quarter’s slowdown was the crumbling housing market. Investment in home building was cut by 17 per cent, on an annualized basis. That came after such investment was slashed at an even deeper 19.8 per cent pace in the fourth quarter.
Weak investment by businesses in inventories also held back first-quarter GDP. However, business investment in equipment and software edged up at a 1.9 per cent pace in the first quarter. That was lacklustre but nevertheless marked an improvement from the 4.8 per cent cut in the fourth quarter.
The country’s bloated trade deficit also weighed on first quarter economic growth, shaving 0.52 percentage point off GDP.
Another factor holding back GDP in the first quarter was a 6.6 per cent drop, on an annualized basis, in federal defence spending. That was the biggest cut since the final quarter of 2005.
Consumers whose shopping is indispensable to a booming economy boosted their spending at a 3.8 per cent pace in the first quarter. That was a solid showing although it was slightly weaker than the 4.2 per cent growth rate logged in the fourth quarter.
A key reason why consumers have remained resilient, even in the face of the painful housing slump, is that the jobs markets has managed to stay in good shape. The nation’s unemployment rate dropped in March to 4.4 per cent, matching a five-year low.
