U.S. Economy Grows at Modest Rate in First Three Months of '03

WASHINGTON – The U.S. economy (search), frozen at the start of the year by war anxieties, still managed to eke out growth at an annual rate of 1.6 percent in the first three months, easing fears that the country could be headed for a double-dip recession.

The Commerce Department (search) reported that the increase in output of the gross domestic product -- the broadest measure of economic health -- in the first quarter was slightly better than the 1.4 percent rate of growth turned in during the October-December period last year.

The strength in the first three months came from a narrowing of the nation's trade deficit (search), strong housing purchases of clothing, food and other nondurable items which offset a further drop in sales of cars and other durable goods.

In the weeks leading up to the war, consumer and business confidence plunged as fears increased over what a U.S. invasion of Iraq might do in terms of disrupting global oil supplies or generating new terrorist attacks. Economic activity came to a near standstill in February as the country was also hit by severe winter snowstorms.

Economists began to worry that the tepid recovery from the 2001 recession might be in danger of stalling out altogether with some predicting that the first quarter GDP number might turn negative. By one rule of thumb, a recession occurs when GDP posts two consecutive negative quarters.

However, with the small 1.6 percent GDP growth rate in the first quarter, those fears will be lessened, especially given the fact that the Iraq war was concluded quickly without serious damage to Iraq's oil fields.

Economists caution that there are still threats, especially if a new wave of job layoffs causes consumers to suddenly halt their spending, which accounts for nearly two-thirds of total economic activity.

In an effort to deal with that threat, President Bush is campaigning to preserve as much of his $726 billion in proposed new tax cuts as he can. Opponents in Congress argue that the nation cannot afford further tax relief at a time when the budget deficit is exploding.

Bush's goal is to bolster consumer spending enough to spark faster economic growth and a declining unemployment rate. Even though the country has been growing again for more than a year, the number of job layoffs is still rising, including nearly a half million job cuts in February and March alone.

An inflation gauge that is tied to the GDP report showed that prices in the first quarter were rising at an annual rate of 3.6 percent, compared to an increase of just 1.8 percent in the fourth quarter, a jump that reflected the big runup in energy costs in the weeks prior to the beginning of the war.

However, excluding volatile food and energy, prices in the first quarter were rising at an annual rate of 2 percent, a more modest pickup from the 1.5 percent rate of the October-December period.

The past two quarters, with growth of 1.6 percent in the January-March period and 1.4 percent in the October-December period, both showed a pronounced slowdown. They dropped from a 4 percent growth rate turned in during the July-September quarter last year.

GDP growth turned positive in the final three months of 2001 after three negative quarters of growth marking the country's first recession in a decade.

For the January-March period, consumer spending rose at an annual rate of 1.4 percent, down just slightly from the 1.7 percent pace of the fourth quarter last year. This reflected continued strength in consumer purchases of non-durable goods, which were rising at a 4.2 percent annual rate, offsetting a 1.1 percent rate of decline in the purchase of big-ticket items such as cars.

Housing construction, powered by the lowest mortgage rates since the early 1960s, was another standout performer during the first three months of the year, soaring ahead at an annual rate of 12 percent.

This strength helped to limit the damage from a big drop in non-residential investment which was falling at an annual rate of 4.2 percent. This decline reflected the fact that companies worried about the fallout from the war put their investment plans on hold.

Another factor helping keep growth positive in the first quarter was a sharp narrowing in the trade deficit reflecting a big drop in imports. This contributed more than half of the quarter's total growth.

Government spending, which had surged at an annual rate of 4.6 percent in the fourth quarter, rose by a more modest rate of 0.9 percent in the first quarter. This increase reflected a 2.6 percent rate of growth in federal spending which offset a 0.1 percent drop in spending at the state and local level, where lawmakers have been cutting services to deal with severe budget shortfalls.