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Economy grows by only 0.6 percent in first quarter

Wednesday, April 30, 2008

WASHINGTON —  The bruised economy limped through the first quarter, growing at just a 0.6 percent pace as housing and credit problems forced people and businesses alike to hunker down.

The country's economic growth during January through March was the same as in the final three months of last year, the Commerce Department reported Wednesday. The statistic did not meet what economists consider a definition of a recession _ which is a contraction of the economy. This means that although the economy is stuck in a rut, it is still managing to grow, even if slightly.

Many analysts were predicting the gross domestic product (GDP) would weaken a bit more _ to a pace of just 0.5 percent _ in the first quarter. Earlier this year, some thought the economy would actually lurch into reverse during the opening quarter. Now, they say they believe that will likely happen during the current April-to-June period.

"The economy is weak but not collapsing," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group. "A recession can't be ruled out, although the stars are not lined up at this point to definitively say one way or the other."

On Wall Street, the Dow Jones industrials closed down 11.81 points.

Gross domestic product measures the value of all goods and services produced within the United States and is the best measure of the country's economic health. Voters are keenly worried about the country's economic problems and so are politicians _ in Congress, in the White House and on the campaign trail.

White House press secretary Dana Perino said the administration was disappointed in the figures. "This is nothing to crow about," she said. "It is very slow growth, but it is growth nonetheless."

The housing situation turned more bleak in the first quarter, as record-high foreclosures dumped more unsold homes on the market, adding to builders' headaches. Builders slashed spending on housing projects by a whopping 26.7 percent on an annualized basis. That was the most in 27 years and the biggest drag on the economy.

Consumers _ whose spending is vital to the country's economic health _ turned much more cautious, also restraining overall economic growth in the first quarter. Their spending rose at just a 1 percent pace. That was down from a 2.3 percent growth rate and was the slowest since the second quarter of 2001, when the United States was suffering through its last recession. Shoppers did cut spending on such things as cars, furniture, household appliances, food and clothes.

Soaring energy and food prices are walloping people's pocketbooks, leaving them with less to spend on other things. The credit crunch also has made it harder for people to finance big ticket items, such as cars and homes. And, many homeowners watching their homes slump in value, also are feeling less wealthy and less inclined to spend.

Another report Wednesday, this one from the Labor Department, showed that workers' compensation _ including wages and benefits _ grew 0.7 percent in the first quarter, the slowest pace in two years. Many economists were expecting a 0.8 percent rise. The report suggests the weak labor market is making employers a bit less generous with their compensation.

Businesses, meanwhile, reduced spending on equipment and software at a 0.7 percent pace, the most since the final quarter of 2006. And, they trimmed spending on commercial construction at a 6.2 percent pace, the most since the third quarter of 2005.

However, growth in businesses' inventories of supplies was a big force adding to GDP. That could reflect both stronger foreign demand for U.S merchandise and weaker domestic sales, analysts said. Exports of U.S. goods and services, which increased at a 5.5 percent pace, also helped first-quarter growth. U.S. exports are being helped by the falling value of the U.S. dollar, which makes U.S. made goods and services less expensive to foreign buyers.

Spending by the government was another factor helping out GDP in the first quarter. That spending rose at a 2 percent pace for the second quarter in a row.

To bolster the economy, the Federal Reserve lowered a key interest rate by one-quarter percentage point to 2 percent Wednesday. That marked a more moderate-sized rate reduction after a recent string of hefty cuts. Many economists believe the Fed, which started dropping rates last September, may be nearing the end of its rate-cutting campaign because policymakers don't want to aggravate inflation. Those rate reductions, which take months to affect economic activity, can sow the seeds of inflation down the road.

An inflation measure linked to the GDP report showed that prices grew at a rate of 3.5 percent in the first quarter, down from a 3.9 percent pace in the prior quarter.

Another gauge showed that the core prices excluding food and energy rose at a rate of 2.2 percent in the first quarter. That was a lower than the 2.5 percent pace registered in the fourth quarter but still outside the Fed's comfort zone. The upper level of the Fed's inflation tolerance is 2 percent.

Gas and food prices, however, have moved higher since the start of the year, adding to inflation pressures. Gasoline prices, which have recently set new record highs, have climbed to $4 a gallon in some parts of the country.

A growing number of economists believe the economy is in a recession and is indeed contracting now.

Under one rough rule, if the economy contracts for six straight months it is considered to be in a recession. That didn't happen in the last recession _ in 2001_ though. A panel of experts at the National Bureau of Economic Research that determines when U.S. recessions begin and end uses a broader definition, taking into account income, employment and other barometers. That finding is usually made well after the fact.

During the first three months of this year, job losses neared the staggering quarter-million mark. The unemployment rate has climbed to 5.1 percent and is expected to move higher in the coming months.

Fed Chairman Ben Bernanke, earlier this month, acknowledged for the first time that a recession this year was possible.

President Bush on Tuesday said the country was dealing with "difficult times." Bush said he understood Americans' anxiety over soaring gas prices, record-high home foreclosures and other economic woes.

The government's $168 billion economic-stimulus package _ including tax rebates that started flowing to bank accounts on Monday _ should help energize the economy in the second half of this year, the Bush administration and Federal Reserve officials say. Democrats in Congress insist more relief needs to be provided, including additional unemployment benefits to cushion the pain of joblessness. The administration has resisted, saying the rebates and other stimulative efforts should be sufficient once they fully kick in.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.





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