April 27, 2007 / 12:32 PM / 13 years ago

GDP growth weakest in four years

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.

Shipping containers are unloaded at Port Newark in Newark, New Jersey February 24, 2006. Weaker exports and a steady slide in spending on homebuilding helped slow U.S. economic growth to its softest pace in four years during the first quarter, the Commerce Department reported on Friday. REUTERS/Chip East

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.


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.

A price gauge favored by the Federal Reserve — personal consumption expenditures excluding food and energy items — increased at a 2.2 percent rate in the first quarter, slightly ahead of forecasts for a 2.1 percent advance.

That was up substantially from the fourth quarter’s 1.8 percent rate and is likely to keep Fed policy-makers wary about the potential for a pickup in inflation.

But Pierre Ellis, a senior economist with Decision Economics Inc. in New York, said the GDP report’s indication that consumers still were spending and the fact that growth was losing some steam could be helpful for policy-makers.

“The weakness in the total is actually a silver lining for the Fed because it reduces stress on resources without the number suggesting any fundamental new weakness in the economy,” Ellis suggested.

The GDP report showed consumers increased spending in the first quarter at a 3.8 percent annual rate, down modestly from the 4.2 percent rate in the fourth quarter but a significant reservoir of strength since consumer spending accounts for about two-thirds of national economic activity.


A second report, from the Labor Department, demonstrated corporate efforts to keep employee benefits damped, with overall employment costs rising a smaller-than-expected 0.8 percent in the first quarter.

That occurred despite a 1.1 percent gain in wages and salaries, the strongest since a 1.3 percent rise in the first quarter of 2001, as benefits costs edged up a scanty 0.1 percent, the least since a matching 0.1 percent rise in the first quarter of 1999.

The GDP report showed some signs of resilience in business investment, with spending up at a 2 percent rate in the first quarter, partly recovering from a 3.1 percent decline in the closing quarter of 2006.

Exports declined at a 1.2 percent rate in the first quarter, a sharp reversal from the fourth quarter’s 10.6 percent advance. It was the first decline in exports since the second quarter of 2003 when they fell at a 1.7 percent rate.

Additional reporting by David Lawder

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