Economy Still Grew During 1st Quarter, But Just Barely

The bruised economy limped through the first quarter of this year at only 0.6 percent as housing and credit problems forced people and businesses alike to hunker down.

AP

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 the classic definition of a recession, which is a retraction of the economy.

This means that although the economy is stuck in a rut, it is still managing to grow, even if modestly.

Many analysts were predicting that 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 economists 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.

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.

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, the most in 27 years. That was the big 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.

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--often their single-biggest asset--slump in value, also are feeling less wealthy and less inclined to spend.

Another report from the Labor Department Wednesday 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 that the weak labor market is making employers a bit less generous with their compensation.

Businesses, meanwhile, cut back 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, businesses boosted their investment in building up stocks of supplies in the first quarter, a big force adding to GDP.

Exports of U.S. goods and services 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 is expected to lower a key interest rate by one-quarter percentage point to 2 percent later Wednesday.

That would mark 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.

© 2009 CNBC.com