U.S. Economy Grew at Revised 1.3% Annual Rate in First Quarter
By Carlos Torres
Washington, May 25 (Bloomberg) -- The U.S. economy grew in the first quarter at a slower pace than the government previously estimated, reflecting the largest decline in inventories in 18 years. The rate of business investment in new equipment and software also fell.
First-quarter gross domestic product, the total of all goods and services produced in the U.S., grew at a 1.3 percent annual pace, slower than the 2 percent rate of increase previously reported, the Commerce Department said. Increases in consumer and government spending and an improvement in the balance of trade were enough to keep the economy growing in the first quarter.
After nine months of the slowest annualized growth since July 1995-March 1996, the outlook for the economy is rocky in the months ahead, Federal Reserve Chairman Alan Greenspan said yesterday.
``The period of sub-par economic growth is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated, requiring further policy response,'' Greenspan told the Economic Club of New York.
A slow economy helps explain why corporate profits are weak. After-tax corporate profits fell for a second straight quarter, the first back-to-back decrease since the last half of 1998, today's report showed.
The Fed reduced their benchmark overnight bank lending rate five times this year to a seven-year low of 4 percent. They next meet June 26-27. Central bankers have room to lower interest rates because inflation isn't a problem, Greenspan said.
Inflation
While today's report showed that inflation accelerated in the first quarter from the prior three months, prices will stay contained in coming months, Greenspan said. ``With energy prices probably peaking and the easing of tightness in labor markets expected to damp wage increases, prices seem likely to be contained,'' he said.
The GDP deflator, a broad measure of inflation tied to the report, rose at an unrevised 3.2 percent annual pace, compared with a 2 percent rate on increase in the fourth quarter.
Analysts surveyed by Bloomberg News expected the government to revise first quarter growth to a 1.4 percent annual pace. The 2.9 percent annualized growth rate between July and March is the slowest nine-month pace since 2.4 percent in the three quarters ended March 1996, according to statistics compiled by Bloomberg.
Businesses were even more successful in trimming inventories than previously thought. Stockpiles fell by $18.9 billion at an annual pace in the first quarter, compared with a decrease of $7.1 billion initially reported.
Stockpiles
The inventory reduction, the first since the third quarter of 1991, was the largest since a $42 billion decrease in the first three months of 1983, Commerce officials said. The first-quarter decrease subtracted 3 percentage points from GDP.
Still, if consumer spending picks up, the reduction in inventories may boost factory production in the months ahead, analysts said.
``We are getting to the point were production cuts have eaten away enough at surplus stockpiles and, if spending starts to pick up at all, manufacturers are going to have to start producing goods again and maybe even hire more workers,'' said Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis, before the report.
Business investment in equipment and software decreased at a 2.6 percent annual rate in the first quarter, compared with a previously reported 2.1 percent drop. In the fourth quarter, business investment fell at a 3.3 percent annual rate. The back-to- back declines were the first since the 1990-1991 recession.
New Equipment
Reduced business investment is a concern of Fed policy makers. ``The erosion in current and prospective profitability, in combination with considerable uncertainty about the business outlook, seems likely to hold down capital spending going forward,'' Fed officials said in their May 15 statement announcing the last rate reduction. This restraint on spending ``continues to weigh on the economy.''
Consumer spending, which accounts for two-thirds of the economy, will help determine whether growth picks up in coming months, analysts said.
``Consumer spending will probably decelerate in the second quarter relative to the first,'' said Steven Wieting, an economist at Salomon Smith Barney in New York, before the report. Increasing layoffs and slowing income growth along with higher energy costs means ``you get a fairly cautious consumer going forward.''
Consumer spending grew at a 2.9 percent annual rate in the first quarter, down from the 3.1 percent rate previously reported. In the fourth quarter, consumer spending increased at a 2.8 percent rate.
Spending
Spending on durable goods, such as autos, home appliances and other big-ticket items, increased at a 12.2 percent annual rate, compared with a 11.9 percent growth rate previously reported. Spending on non-durable goods rose at a 1.5 percent pace compared with a rise of 2.6 percent previously reported.
Government spending increased at a 4.7 percent annual pace in the first quarter, previously reported as rising at a 4 percent annual rate. In the fourth quarter, government expenditures rose at a 2.9 percent annual rate.
Exports totaled $1.132 trillion, lower than previously estimated while imports totaled $1.544 trillion, more than first thought. That left a net trade deficit of $411.9 billion, more than the $404.9 billion previously estimated. In the fourth quarter, the net trade deficit was $441.7 billion.
Construction spending on homes rose at a 2.9 percent annual rate, revised from the 3.3 percent pace previously reported.
Slower economic growth has led to weaker corporate profits and prompted businesses to cut back on their spending on new equipment and plants that improve efficiency.
Corporate Profits
First-quarter after-tax corporate profits, reported for the first time today, fell at a 3.1 percent annual rate after declining at a 4.3 percent annual rate in the fourth quarter. The last time profits fell in consecutive quarters was during the final six months of 1998.
``We expect corporate profits to fall for most of the year,'' said Sung Won Sohn, chief economist at Wells Fargo Bank in Minneapolis, before the report. Increased competition from slowing economy means that ``companies aren't able to pass higher costs on to consumers,'' he said.
Non-residential fixed investment, which includes commercial construction as well as business equipment and software, rose at a 2.1 percent annual rate in the first quarter, previously reported as rising at a 1.1 percent annual rate. That was up from the 0.1 percent rate of decline in the fourth quarter.
Real final sales, which exclude inventories, rose at a 4.4 percent annual rate, previously reported as rising at a 4.6 percent annual rate.
The personal consumption expenditures price index, a measure of inflation watched by Fed policy makers and tied to spending, rose at a 3.2 percent annual pace, down from a 3.3 percent annual rate previously reported. In the fourth quarter, the personal consumption expenditures price index rose at a 1.9 percent annual rate.
Adjusted for inflation, GDP totaled $9.42 trillion in the first quarter when measured at an annual rate, compared with a previous estimate of $9.44 trillion. In the fourth quarter, GDP totaled $9.39 trillion at an annual rate. |
