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Economy Grew Only 0.6% in Quarter, Weaker Than Expected

The economy nearly stalled in the first quarter with growth slowing to a pace of just 0.6%, the worst three-month showing in over four years.

The new reading on the gross domestic product, released by the Commerce Department Thursday, showed that economic growth in the January-through-March quarter was much weaker. Government statisticians slashed by more than half their first estimate of a 1.3% growth rate for the quarter.

The main culprits for the downgrade: the bloated trade deficit and businesses cutting investment in supplies of the goods they hold in inventories.

For nearly a year, the economy has been enduring a stretch of subpar economic growth due mostly to a sharp housing slump. That in turn has made some businesses act more cautiously in their spending and investing.

Recent US GDP Reports

Quarter
GDP (billions)
% Chg (annual rate)
2006 - Q1 11316.4 + 5.58%
2006 - Q2 11388.1 + 2.56%
2006 - Q3 11443.5 + 1.96%
2006 - Q4 11513.0 + 2.45%
2007 - Q1 11532.8 + 0.69%
source: Haver Analytics

The economy's 0.6% growth rate in the opening quarter of this year marked a big loss of momentum from the 2.5% pace logged in the final quarter of last year.

Federal Reserve Chairman Ben Bernanke doesn't believe the economy will slide into recession this year, nor do Bush administration officials. But ex Fed chief Alan Greenspan has put the odds at one in three.

The first-quarter's performance was the weakest since the final quarter of 2002, when the economy recovering from a recession. At that time, GDP eked out a 0.2% growth rate. Economists were predicting the first-quarter performance this year would be downgraded, but not as much as it did. They were calling for a 0.8% growth rate pace.

GDP measures the value of all goods and services produced in the United States. It is considered the best measure of the country's economic fitness.

In more encouraging economic news, the Labor Department reported that fewer people signed up for unemployment benefits last week. New filings dropped by 4,000 to 310,000. That suggests the employment climate is weathering well the economy's sluggish spell.

Many economists believe the first quarter will be the low point for this year. They expect growth will improve but still be sluggish.

The National Association for Business Economics predicts the economy will expand at a 2.3% pace in the April-to-June quarter.

In the first quarter, there was a larger trade deficit than first thought. That ended up shaving a full percentage point from the GDP. Businesses cut back on inventory investment as they tried to make sure unsold stocks of goods didn't get out of whack with customer demand. That lopped off nearly a percentage point to first quarter GDP.

Those were the biggest factors behind the government slicing its initial GDP estimate released a month ago by as much as it did.

The sour housing market also restrained overall economic activity. Investment in home building was cut by 15.4%, on an annualized basis, in the first quarter. However, that wasn't as deep a cut as the 17% annualized drop initally estimated. And, it wasn't as severe as the 19.8% annualized drop seen in the final quarter of last year.

Even so, there is no doubt that troubled housing market is one of the biggest problems for the economy. Although some businesses tightened the belt in the first quarter, consumers did not. That helped to prevent the economy from stalling out altogether.

Consumers boosted their spending by a 4.4% growth rate in the first quarter, the most in a year. Consumer spending accounts for a major chunk of economic activity.

Some economists wonder how much interest consumers will have in continued brisk spending, however, given rising gasoline prices that have topped $3 a gallon in many markets. More money spent filling up the gas tank leaves less to spend on other things.

One of the reasons consumers have stayed so resilient even as the housing market has been stuck in a rut for a year is because the job market has been good.

However, there have been recent signs that the job market--while still healthy--is slowing a bit.

The unemployment rate edged up to 4.5% in April as payrolls grew by just 88,000, the fewest in more than two years.

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% in the first quarter. That was unchanged from its initial estimate but up from a 1.8% pace in the fourth quarter.

The Federal Reserve's key interest rate has been at 5.25% for nearly a year. Many economists predict the rate probably will stay right where it is through the rest of this year.