Economy Grows at Poky 1.4 Percent Rate in First Quarter

The economy was more sluggish in the first three months of 2003 than previously thought and grew at a poky annual rate of just 1.4 percent, underscoring the country's struggles to break through its economic lethargy.

The final reading on gross domestic product in the January to March quarter was lower than the 1.9 percent growth rate estimated just one month ago as well as an initial estimate of a 1.6 percent growth rate, the Commerce Department (search) reported Thursday.

Considered the broadest barometer of the economy's health, GDP measures the total value of goods and services produced within the United States.

In another report, new claims for unemployment benefits dropped last week by a seasonally adjusted 22,000 to 404,000 a three month low, the Labor Department (search) said. The report suggested that the pace of layoffs -- while still high -- is stabilizing.

The latest reading on first-quarter GDP was weaker than economists were expecting. They were forecasting GDP to be unchanged at the previous estimate of a 1.9 percent growth rate.

The mediocre 1.4 percent pace registered in the first quarter matched the economy's growth rate posted in the final three months of 2002.

The outlook for the current April-June quarter isn't expected to be much better than the first quarter's performance and could turn out to be worse. Forecasts for second-quarter GDP range anywhere from a 1 percent rate to a rate of more than 2 percent.

The government will release its first estimate of second quarter GDP on July 31.

One of the major reasons behind the downward revision to economic growth in the first quarter was that business invested less in building their inventories during the quarter than estimated a month ago. That resulted in a much larger drag on GDP, shaving off a sizable 0.82 percentage point from first quarter growth, compared with a 0.48 percentage-point reduction previously estimated.

Businesses, wanting profits to mend and facing lackluster customer demand, have been reluctant to crank up capital spending and hiring, key factors in returning the economy to full speed.

In the first three months of this year, businesses were faced with another concern: uncertainties related to the war in Iraq, which had many companies putting off major business moves.

Businesses cut spending on new plants, office buildings and other structures at a rate of 2.9 percent in the first quarter, compared with a 0.4 percent rate of increase estimated a month ago. Businesses also cut spending on equipment and software in the first quarter.

Consumers, the main force keeping the economy going, increased their spending at a rate of 2 percent in the first quarter. That was the same as previously estimated, but still considered a pace suggesting that shoppers were cautious and didn't splurge.

Federal Reserve Chairman Alan Greenspan (search) and his colleagues cut a key interest rate by a quarter percentage point on Wednesday to a 45-year low of 1 percent.

Lower borrowing costs might motivate consumers and businesses to spend and invest more and give a boost to economic growth.

"The committee judged that a slightly more expansive monetary policy would add further support for an economy which it expects to improve over time," the Fed said.

The rate reduction, Fed policy-makers said, also would help to ward off the remote possibility of an economically dangerous slide in prices, called deflation, which could emerge out of a stagnant economy.

Economists are hopeful that the economy will stage a material rebound in the second half of this year as a fresh round of tax cuts and super low short-term interest rates take hold. Some are predicting economic growth in the second half in the range of a 3.5 percent to 4 percent rate.