U.S. Economy Grows at a 3.1% Rate; Prices Accelerate (Update1)
U.S. Economy Grows at a 3.1% Rate; Prices Accelerate
April 28 (Bloomberg) -- The U.S. economy expanded at a 3.1 percent annual rate in the first quarter, less than forecast and the slowest in two years, as the trade deficit widened and rising gasoline prices limited consumer and corporate spending. A measure of inflation tied to the report accelerated.
The initial estimate of gross domestic product, the total value of goods and services produced in the U.S., followed growth of 3.8 percent in the fourth quarter, the Commerce Department said today in Washington. A 3.5 percent pace was the median forecast in a Bloomberg News survey of economists.
The higher fuel costs that stung consumers may have made companies less inclined to invest as much in new equipment as orders slowed, economists said. Business spending on equipment and software rose at the slowest pace in two years and inventories piled up by the most since the second quarter 2000.
``The rise in inventories was an especially unwelcome development as it means consumer demand is not clearing the well- stocked store shelves as much as companies had planned for,'' said Chris Rupkey, senior financial economist at Bank of Tokyo- Mitsubishi Ltd. in New York. ``If this inventory is not cleared quickly, it will lead to cutbacks at the factory.''
The personal consumption price index excluding food and energy, a measure tied to consumer spending that's watched by Federal Reserve policy makers, rose at a 2.2 percent annual rate last quarter, the fastest since the fourth quarter of 2001. It increased 1.7 percent in the final three months of last year.
Federal Reserve
Faster inflation and slower growth suggest Fed policy makers will keep to their ``measured'' pace of raising interest rates for most of this year, economists said.
``With the softer growth numbers we've been seeing, the Fed doesn't have much reason to do anything differently than it has been doing,'' said John Shin, an economist at Lehman Brothers Inc. in New York, before the report. ``Inflation is picking up, and there's no concern that growth will plummet, so they'll keep hiking interest rates in 25 basis-point chunks.''
The implicit price deflator, the measure of prices tied to the report, rose at a 3.2 percent annual rate following the fourth quarter's 2.3 percent gain.
Fed Governor Donald Kohn said in a speech on April 22 that ``as the economy expands, our attention shifts a little bit more to the inflation side.'' Kohn said inflation will ``moderate'' later this year as long as energy prices don't keep rising, allowing policy makers to raise rates at a ``measured'' pace.
Nominal Growth
Central bankers next meet on May 3 and are forecast to raise the overnight bank lending rate to 3 percent from 2.75 percent. It would mark the eighth such increase in as many meetings.
First-quarter growth estimates ranged from 2.8 percent to 4.5 percent. The GDP estimates are the first for the quarter and will be revised as more data become available. Growth from January through March was the slowest since a 1.9 percent pace in the first quarter of 2003.
The total amount of all goods and services produced by the U.S. economy, the world's largest, rose to $11.08 trillion when annualized and adjusted for inflation. Without adjustment, GDP grew at a 6.4 percent annual pace to $12.18 trillion for the quarter compared with 6.2 percent in the previous three months.
Inflation-adjusted growth is just below the average of the record expansion from 1991 to 2001, when the economy grew at an average 3.3 percent pace.
Trade Deficit
``We are seeing momentum continue,'' said David Goode, chief executive officer at Norfolk Southern Co., in an interview yesterday. Norfolk Southern is the fourth-largest railroad. ``We are hearing from our shippers that they expect to see good volumes throughout the year.''
The U.S. trade deficit subtracted 1.49 percentage points from first-quarter growth, the most since the fourth quarter of 2002. The gap in February widened to $61 billion, the Commerce Department said April 12. U.S. exports have risen little since December, the report showed. The surge in oil prices led to a jump in the value of imports.
Prices of crude oil futures on the New York Mercantile Exchange rose 32 percent from end of December through March. The average price of a gallon of gasoline rose 20 percent, according to the Department of Energy.
Consumer purchases, which account for more than two-thirds of the economy, expanded at a 3.5 percent annual pace after rising 4.2 percent in the fourth quarter. Last year's consumer spending growth of 3.8 percent was the most since 2000.
Second Quarter
``With gas prices consistently above $2 a gallon, it's hard to believe that consumer spending will continue to be as vibrant as it's been,'' said Michael Miles, chief operating officer of Staples Inc., the world's largest office supplies retailer, in an interview yesterday.
Economists at Action Economics LLC and Merrill Lynch & Co. trimmed second-quarter growth estimates this month after recent reports showed weaker consumer and business demand. Mike Englund at Action Economics in Boulder, Colorado, cut his second-quarter forecast to 3.5 percent from the 4.2 percent he had projected in early April. David Rosenberg at Merrill Lynch, who had projected 3.5 percent growth, now estimates the economy will expand at a 2.5 percent rate this quarter.
The economy entered the second quarter on soft footing. A Commerce report yesterday showed U.S. durable goods orders unexpectedly fell last month by the most in more than two years, and a gauge of future business spending in the report fell the most since November 2003.
Ford Motor Co., the second-biggest U.S. automaker, cut production in North America by 9.9 percent during the first quarter. On March 1, the company said it planned to pare second-quarter production by 1.2 percent. Ford and General Motors Corp. have been trying to jumpstart sagging sales and reduce bloated inventories.
Equipment and Software
Business fixed investment, which includes spending on commercial construction as well as on equipment and software, rose at a 4.7 percent annual rate in the first quarter, the weakest in a year, compared with a 14.5 percent gain in the fourth quarter.
Spending on equipment and software grew at a 6.9 percent rate, the slowest in two years, after an 18.4 percent gain in the fourth quarter.
Companies boosted inventories at an $80.2 billion annual rate, compared with $47.2 billion in the prior quarter. That contributed 1.21 percentage points to growth. Real final sales, or GDP minus inventories, increased at a 1.9 percent annual rate in the first quarter, the slowest since the fourth quarter of 2002.
Residential housing construction rose at a 5.7 percent annual rate in the first quarter, compared with 3.4 percent for the fourth quarter. Government spending rose at a 0.6 percent pace from January through March after a 0.9 percent rise.
To contact the reporter on this story: Joe Richter in Washington at Jrichter1@bloomberg.net
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