GDP growth weakest in four years

By Glenn Somerville

WASHINGTON (Reuters) - Economic growth during the first quarter was the weakest in four years, hurt by a slumping housing market and deteriorating international trade, the Commerce Department reported on Friday.

At the same time, one price gauge in the GDP report posted its biggest jump in 16 years, sending a jolt of fear through financial markets that official interest rates will stay high.

Gross domestic product or GDP, which measures total goods and services output within U.S. borders, increased at a weaker-than-expected 1.3 percent annual rate in the three months from January through March.

That was half the fourth quarter's 2.5 percent rate and well below the 1.8 percent that Wall Street analysts had forecast. Vital consumer spending held up relatively well but there were signs in a later report that costlier gasoline and lower housing prices might cast a shadow on the outlook.

The Reuters/University of Michigan Surveys of Consumers sentiment index showed a reading of 87.1, down from 88.4 in March and the lowest in seven months. It was the third straight monthly fall in the index but the final April reading was not as low as forecast.

The U.S. economy powered ahead at a 5.6 percent rate in the first quarter of 2006, but has been slowing in recent months as a hard-hit housing sector has led to rising defaults and caused builders to scale back until inventories are reduced.

Residential spending shrank by 17 percent in the first quarter following declines of 19.8 percent in the fourth quarter and 18.7 percent in the third quarter last year.

CONFIDENCE UNSHAKEN

In a telephone interview, Commerce Secretary Carlos Gutierrez said he remained confident the economy will rebound on the back of strong consumer spending bolstered by rising stock prices and healthy business investment.

"We're getting through a significant adjustment in residential spending but we knew it was coming," Gutierrez said. "The consensus forecast remains that we will begin to rebound from it around mid-year."

Prices for Treasury debt prices were higher across the board, but gave up some initial gains as traders worried about lofty inflation measures in the GDP report.

Stock futures were flat at mid-day and the dollar's value, after initially dropping to a record low against the euro, recovered some of its strength.

But Steve Barrow, a foreign exchange specialist with Bear Stearns in London, said the dollar was likely to remain under pressure out of concern about softening U.S. growth.

"You have a low GDP growth and a high deflator and that's the worst combination," Barron said. "The idea of stagflation will not be far from the market's mind."

The implicit deflator, one of several price measures within the GDP report, jumped at a four percent rate in the first quarter, more than double the prior quarter's 1.7 percent rate. It was the biggest rise in this gauge since the start of 1991.