Economy Continues Slowing Trend

The U.S. economy limped along in the first three months of the year at a pace much slower than the government previously thought. The biggest drag on growth came from companies struggling to get rid of their unsold goods.

Gross domestic product — the country's total output of goods and services — grew at an annual rate of just 1.3 percent from January to March, the Commerce Department reported Friday.

The latest GDP was much lower than the government's estimate one month ago that the economy had expanded at a rate of 2 percent during the first quarter, a pace that surprised many and raised hopes that the severe slowdown that began last summer was coming to an end.

The lower estimate came one day after Federal Reserve Chairman Alan Greenspan said the worst of the slowdown may not be over. He signaled that the Fed, which has slashed interest rates five times this year to ward off recession, may order additional cuts.

Friday's report "does buttress the concerns that have been expressed by Mr. Greenspan ... that economic weakness remains the greatest risk," said economist Joel Naroff of Naroff Economic Advisors.

The 1.3 percent first-quarter growth rate came after an anemic 1 percent showing in the fourth quarter of 2000. Some economists project the economy will grow at a similar low rate this quarter, while others believe it will slow down even further because of sluggish consumer and business spending.

"The economy is still stuck in the slow lane," said Stuart Hoffman, chief economist at PNC Financial Services Group. "I think the economy is still in positive territory, but barely so, in the second quarter."

Two other reports released Friday provided fresh evidence of the weak state of the economy at the start of the second quarter.

Orders to U.S. factories for costly manufactured goods expected to last at least three years, such as cars, plunged in April by 5 percent, the largest drop since January. Demand fell sharply for transportation equipment, computers and semiconductors.

Sales of previously occupied homes fell last month by 4.2 percent. It was the second decline this year but still left sales at a rate of 5.20 million, close to a near record high, the National Association of Realtors said.

However, economists worry that the decline, which followed an even sharper 9.5 percent drop in new-home sales in April, may be signaling that housing activity — one of the bright spots during the slowdown — is beginning to falter.

The two reports "indicate housing and capital spending will be holding down the economy's performance in the second quarter," said Lynn Reaser, chief economist at Banc of America Capital Management. "Consumers remain the wild card."

Flagging demand has created a pileup of unsold goods, which businesses are feverishly trying to whittle down. That effort subtracted 2.96 percentage points from growth in the first quarter.

While paring inventory reduces economic growth, economists said the excess must be cleared before companies can begin revving up production. Greenspan said in his Thursday night speech that he doesn't know how long that process will take.

Another drag on growth: Business investment in computers and other equipment decreased at an annual rate of 2.6 percent in the first quarter, the second consecutive quarterly drop for a sector that has been one of the pillars supporting the country's record 10-year expansion.

Consumer spending also was revised down to a lackluster annual rate of 2.9 percent in the first quarter, far below the 7.6 percent rate during the same period a year ago.

Given that the economy's record expansion has been powered by business investment — particularly in high-tech equipment — and robust consumer spending, economists were disheartened by the latest figures.

The economic slowdown and higher energy costs took a toll on corporate profits. After-tax profits of U.S. corporations fell in the first quarter by 3.1 percent, following a 4.3 percent drop in the fourth quarter, the GDP report said. The last time there were back-to-back declines in corporate profits was in the third and fourth quarters of 1998. Greenspan, in his speech, described the pressure on corporate profit margins as "unrelenting."

An inflation gauge tied to the GDP rose at an annual rate of 3.2 percent in the first quarter, reflecting higher costs for services such as medical care and for natural gas and electricity. That was up from a 1.9 percent rate in the fourth quarter. Still, Greenspan said inflation doesn't pose a current risk to the economy.