U.S. First-Quarter Gross Domestic Product Rises at 1.6% Rate
By Carlos Torres
Washington, April 25 (Bloomberg) -- The U.S. economy grew less than expected from January through March as worries about the war with Iraq and terrorism led to the slowest pace of consumer spending in a decade.
Gross domestic product, the sum of all goods and services produced in the U.S., expanded at a 1.6 percent annual rate last quarter after growing at a 1.4 percent pace in the previous three months, the Commerce Department said. Economists had forecast a 2.4 percent gain, based on the median of 67 forecasts in a Bloomberg News survey.
The road to war pushed crude oil prices to a 12-year high and caused consumer confidence to drop to a nine-year low. With the conflict's end and sentiment improving, the stage is set for faster growth in the second half of the year amid stronger consumer spending, many economists said.
``I don't think there is any doubt that a lot of the weakness is due to geopolitical anxiety,'' said James O'Sullivan, a senior economist at UBS Warburg in Stamford, Connecticut, before the report. ``We do expect a positive bounce over the next couple of quarters.'' O'Sullivan had forecast first-quarter GDP would expand 1.5 percent.
The statistics surface ahead of the May 6 meeting of Federal Reserve policy makers, who have indicated in recent comments that the economy will improve in the second half of the year. The sluggish economy explains why companies eliminated 262,000 jobs in the first quarter.
The economy needs to grow at least 3 percent to reduce unemployment, according to many economists. Growth averaged 3.6 percent a year during the country's record expansion from 1992 to 2000. The last time the economy grew 3 percent or more for two consecutive quarters was in the last six months of 1999.
Adjusted for inflation, GDP totaled $9.556 trillion at an annual rate.
Consumer Spending
Consumer spending, which accounts for 70 percent of the economy, grew at a 1.4 percent annual pace from January to March, the slowest since the first quarter of 1993. Spending rose at a 1.7 percent rate in the fourth quarter of 2002.
The slowdown reflected a 0.5 percent pace of spending on services, which include air travel and lodging. That was the weakest since the first quarter of 1991, at the end of a recession. Commerce officials said a drop in foreign travel, reduced spending on electricity and gas, and a decline in recreational activities were the primary reasons for the slowdown in the first quarter.
Spending on non-durable goods rose a 4.2 percent increase while purchases of durable goods, including automobiles, fell at a 1.1 percent rate after an 8.2 percent slump.
Business Spending
Consumers weren't the only one spending less. Business fixed investment, which includes spending on commercial construction as well as equipment and software, fell at a 4.2 percent annual rate in the first quarter after rising at a 2.3 percent pace in the previous three months. It was led by a 4.4 percent decrease in spending on equipment and software, the first drop in a year and the largest since the third quarter 2001 when the economy was in recession.
Forecasters are at odds about the outlook for corporate spending. ``Stronger demand will eventually boost profits, and in time, we will gradually see an improvement in the business outlook,'' said Chris Wiegand, an economist at Citigroup Global Markets Inc. in New York, before the report. ``That is going to be the second half story.'' Wiegand projects the economy will expand at a 5 percent pace in the last three months of the year.
High corporate debt levels, low profitability and the need to retain cash in order to improve balance sheets ``will limit capital spending and limit hiring,'' said Gerald Cohen, a senior economist at Merrill Lynch & Co. in New York, before the report. ``The economy is going to grow, it's just that it will be sub- par.''
Inventories
Companies added to inventories at a slower pace last quarter. Stockpiles rose by $12.8 billion at an annual pace in the first quarter after increasing by $25.8 billion the previous three months. The slowdown subtracted 0.48 percentage point from GDP.
``We think some of the inventory accumulation in the first quarter was unintended and that firms will seek to bring stocks back into line with sales over the course of the (second) quarter,'' said Ethan Harris, chief economist at Lehman Brothers Inc. in New York, before the report.
General Motors Corp., the world's biggest carmaker, has said it will trim production by 10 percent in the second quarter compared with the same period last year, while rival Ford Motor Co. will make 17 percent fewer vehicles. Total inventories reached an estimated 4.01 million vehicles by March, a record for any month, according to auto industry statistics.
Homebuilding, Trade
Real final sales, which exclude inventories, rose 2.1 percent at an annual rate compared with a 1.1 percent increase in the previous three months. Construction and trade were bright spots in the report.
Spending on home construction increased 12 percent at an annual pace, the fastest in a year, after rising 9.4 percent the previous three months. The increase added 0.53 percentage point to growth.
The trade deficit was less of a drag on the economy last quarter, adding 0.86 percentage point to growth after subtracting 1.59 percentage point in the last three months of 2002. The deficit narrowed by $24 billion at an annual pace after deteriorating by $44.2 in the fourth quarter.
Government spending rose at a 0.9 percent annual pace last quarter, after rising at a 4.6 percent rate in the previous three months.
Consumer Confidence
The slower pace of consumer spending came as confidence stumbled. The fall of Saddam Hussein's regime has since caused sentiment to rebound. The University of Michigan's preliminary consumer sentiment index jumped to 83.2 this month from 77.6 in March.
With confidence improving, households will have less of a need to save, ``setting the groundwork for consumer spending to grow faster,'' said Ram Bhagavatula, head of global research at Royal Bank of Scotland in New York, before the report.
A resolution to the war, a later Easter holiday than usual and sweetened incentives from automakers may already be leading to a rebound in sales. Chain-store sales rose 1.9 percent last week, the biggest increase since December, following a 1.3 percent rise the previous week, according to the Bank of Tokyo-Mitsubishi UBSW weekly sales report.
Some industry estimates suggest auto sales will improve to 17.4 million cars and trucks at an annual rate this month, compared with 16.2 million in March and 17.2 million in April 2002.
Second Quarter
``Early April consumption figures seem to be shaping up pretty nicely,'' said Bhagavatula. ``If that continues, we're going to have to bump up our forecast'' for second quarter growth. Bhagavatula currently expects the economy to expand at a 2.5 percent annual pace this quarter and accelerate to between 3 percent and 4 percent in the last six months of the year.
The war's end and higher inventories have helped crude oil prices drop from $34 a barrel in March to around $25 a barrel this week. That may be benefiting consumers and business as energy prices drop. The average price of a gallon of gasoline at the pump was down to $1.62 last week compared with a peak of $1.77 reached in March.
Not all economists are so sanguine about the consumer.
``It's hard to see strong growth ahead,'' said Lehman's Harris. With autos sales and housing ``already having had their day in the sun,'' a slowdown in those areas ``will really put a cap on whatever recovery you get in the second half of the year,'' he said. Harris expects growth to average 3 percent from July through December.
The GDP price deflator, a measure of prices tied to the report, rose at a 2.5 percent in the fourth quarter, after rising 1.8 percent from October through December.
The economy is expected to grow at a 3.8 percent annual rate by the fourth quarter of this year, according to the consensus estimate of 53 economists surveyed by Blue Chip Economic Indicators this month.
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