GDP Up 3.1%, Lowest Growth in 2 Years

Buffeted by rising energy prices and weakened consumer and business spending, the economy grew at an annual rate of just 3.1 percent in the first quarter. It was the slowest pace of expansion in two years, offering fresh evidence that the economy has hit another "soft patch."

The latest reading on gross domestic product (search), released by the Commerce Department (search) on Thursday, showed that consumers and businesses turned cautious in their spending in the January-to-March quarter, a key factor in the slower economic growth. High energy prices and rising borrowing costs are causing Americans to tighten their belts a bit.

The first-quarter's GDP figure, down from a 3.8 percent pace logged in the final quarter of 2004, represents the economy's most sluggish showing since the first quarter of 2003, when economic activity expanded at an even more mediocre 1.9 percent rate.

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

The newest snapshot of the economy is likely to disappoint economists. Before the report's release, they were forecasting a 3.5 percent growth rate for the first quarter.

That estimate marked a downgrade from just a few weeks ago when economists were predicting that business growth would clock in at a pace of 4 percent or better in the first quarter. But they scrambled to lower those forecasts in the wake of a spate of disappointing economic reports in recent weeks.

Those disappointing reports — including retail sales, industrial production and big-ticket orders to factories — along with Thursday's GDP figure, add to evidence that the economy hit a "soft patch." That's the term

Federal Reserve (search) Chairman Alan Greenspan (search) used last spring when economic growth slowed abruptly.

Economists also are lowering their estimates for growth in the current April-to-June quarter — to around a 3 percent rate — or possibly less.

For now, economists believe any soft patch will be temporary and don't believe that it would be a harbinger of recession. Although a 3.1 percent growth rate may disappoint economists, it is a decent pace of expansion, nevertheless.

President Bush wants to see the economy on solid ground as he tries to sell Americans his vision of overhauling the Depression-era Social Security program. He is promoting the idea of letting workers set up individual investment accounts in stocks and bonds, using a big chunk of payroll taxes to do that.

The signs of slowing economic growth are especially disconcerting because they raise new questions about the state of the labor market, whose recovery from the 2001 recession has been uneven. Payrolls expanded by just 110,000 in March, the fewest new jobs in eight months. The employment report for April will be released by the government next week.

An inflation gauge tied to the GDP report showed and closely monitored by the Federal Reserve showed prices — excluding food and energy — rising at a rate of 2.2 percent in the first quarter of 2005. That was up considerably from a 1.7 percent rate in the fourth quarter and marked the highest reading since the final quarter of 2001.

To combat inflation, Federal Reserve policy-makers have boosted interest rates seven times since last June. An additional increase is expected at the Fed's next meeting on Tuesday.

Economists blame rising prices for energy and other goods for dampening consumer and business spending.

Oil prices, which surged to an all-time high of $57.27 a barrel at the beginning of April, have retreated somewhat since then. Even so, economists are predicting lofty prices for gasoline and other energy products through the summer.

Consumers increased their spending at a 3.5 percent rate in the first quarter. That was down from a 4.2 percent pace in the prior quarter and was the slowest pace since the second quarter of 2004.

Consumer spending on big-ticket goods, such as cars, was flat in the first quarter compared with a 3.9 percent growth rate in the fourth quarter.

Businesses also reined in spending. Spending on equipment and software rose at a rate of 6.9 percent in the first quarter, a big deceleration compared with the hot 18.4 percent growth rate in the fourth quarter. The first quarter's spending figure was the lowest since first quarter of 2003.

Investment by businesses in new plants, office buildings and other structures dropped in the first quarter at an annual rate of 2.6 percent. That contrasted with a 2.1 percent rate of growth in the fourth quarter. The last time spending on structures fell was in the third quarter of last year.

The nation's bloated trade deficit also weighed on economic growth in the first quarter. The deficit shaved a sizable 1.49 percent points off of GDP. That marked the biggest reduction since the last quarter of 2002.