GDP Growth Slows to 1.3 Percent; Housing Slump Eyed as Culprit

Economic growth slowed to a near crawl of 1.3 percent in the first three months of 2007, the worst performance in four years. The main culprit: the housing slump.

The fresh reading on gross domestic product, released by the Commerce Department on Friday, was even weaker than the 2.5 percent growth rate logged in the final three months of last year. The new figures underscored just how much momentum the economy has been losing as it copes with the strain of the troubled housing market, which has made some businesses more cautious in their spending.

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The first-quarter GDP figure was the weakest since a 1.2 percent pace registered in the opening quarter of 2003. GDP measures the value of all goods and services produced within the United States and is considered the best barometer of the country's economic fitness.

"This was tepid activity in the first quarter. The economy was taking a breather," said Ken Mayland, president of ClearView Economics.

The performance was even weaker than what economists expected; they had forecast a growth rate of 1.8 percent.

Still, Federal Reserve Chairman Ben Bernanke and other economists don't expect the economy to fall into a recession this year. Former Fed chief Alan Greenspan has put the odds at one in three, however.

Even though the economy slowed in the first quarter, inflation picked up — a development that will complicate the Fed's work.

An inflation gauge tied to the GDP report and closely watched by the Fed showed that core prices — excluding food and energy — rose at a rate of 2.2 percent in the first quarter, up from a 1.8 percent pace in the fourth quarter. Another measure tracking all prices jumped by 3.4 percent in the first quarter, compared to a 1.0 percent decline, on an annualized basis in the fourth quarter.

Federal Reserve policymakers say the biggest danger to the economy is if inflation doesn't recede as they currently predict.

The Federal Reserve hasn't moved a key interest rate since August. Before that it had steadily lifted rates to ward off inflation. Many economists predict the Fed will continue to leave rates alone when it meets next month. The Fed's goal is to slow the economy sufficiently to key inflation in check, but not so much as to provoke a recession.

In other economic news, employers' costs to hire and retain workers grew by 0.8 percent in the first quarter, down slightly from a 0.9 percent increase in the fourth quarter, the Labor Department reported.

Wages and salaries went up 1.1%, the fastest since 2001. Benefit costs, however, edged up 0.1%, the slowest since the first quarter of 1999. The Fed keeps close tabs on labor costs for clues about inflation.

The reports come as President Bush continues to cope with mediocre ratings from the public on his economic stewardship, according to AP-Ipsos polls. Democrats, who have accused Bush of not doing enough to close the widening gap between high- and low-paid workers, are advocating a boost to the federal minimum wage and policies to help unions.

The biggest factor behind the first-quarter's slowdown was the crumbling housing market. Investment in home building was cut by 17 percent, on an annualized basis. That came after such investment was slashed at an even deeper 19.8 percent pace in the fourth quarter.

Weak investment by businesses in inventories also held back first-quarter GDP. However, business investment in equipment and software edged up at a 1.9 percent pace in the first quarter. That was lackluster but nevertheless marked an improvment from the 4.8 percent cut in the fourth quarter.

The country's bloated trade deficit also weighed on first quarter economic growth, shaving 0.52 percentage point off GDP.

Another factor holding back GDP in the first quarter was a 6.6 percent drop, on an annualized basis, in federal defense spending. That was the biggest cut since the final quarter of 2005.

Consumers whose shopping is indispensable to a booming economy boosted their spending at a 3.8 percent pace in the first quarter. That was a solid showing although it was slightly weaker than the 4.2 percent growth rate logged in the fourth quarter.

A key reason why consumers have remained resilient, even in the face of the painful housing slump, is that the jobs markets has managed to stay in good shape. The nation's unemployment rate dropped in March to 4.4 percent, matching a five-year low.

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