<1st-Quarter Growth Slashed, Inflation Up
Friday June 25, 9:10 am ET
By Andrea Hopkins
WASHINGTON (Reuters) - The U.S. economy grew much more slowly than previously thought in the first quarter while inflation was higher, a government report showed on Friday.
The surprise downward revision to gross domestic product -- which measures total output within the nation's borders -- cut growth to a 3.9 percent annual rate in the first three months of 2004 from the 4.4 percent reported a month ago and below the 4.1 percent pace in the final quarter of last year.
The government also ratcheted up a key gauge of inflation, confirming an acceleration in price rises that has fueled expectations the Federal Reserve will begin raising interest rates from 1958 lows next week to head off inflation.
The core price index for consumer spending -- a favorite of Fed Chairman Alan Greenspan that cuts out volatile food and energy prices -- gained at an annual rate of 2.0 percent in the quarter, a bump up from the 1.7 percent reported a month ago.
Prices for U.S. Treasury bonds seesawed after the report, torn on whether to focus on the slower growth or the faster inflation. The dollar slipped against the euro.
"It is a bit surprising that inflation was worse and consumption was up less," said Mark Vitner, senior economist at Wachovia Securities.
He said the worst in the run-up in inflation may already be past, however, with stronger real growth and lower inflation likely in the second half of the year.
"In terms of the Fed, they have to start raising rates but this report does not shout out for a half-point hike. They can still move at a measured pace," Vitner said.
Fed policy-makers are expected to raise overnight lending rates by a quarter of a percentage point from their current 1 percent after a two-day meeting on Tuesday and Wednesday.
Wall Street analysts had not expected the Commerce Department to change the GDP estimate. The department said the reduction in its final measure of first-quarter economic growth resulted from a sharp upward revision to imports -- which subtract from GDP -- and a downward revision to the amount consumers spent on bank services.
MOUNTING INFLATION
Commerce also provided its price index for market-based personal consumption expenditures, a supplemental measure meant to cover household goods and services purchases that excludes implicit prices such as banking services.
It said the market-based PCE rose at a 3.1 percent annual rate in the first quarter, while the core rose at a more moderate 1.6 percent annual rate. The core rate was double the 0.8 percent pace in the fourth quarter.
Until now, the market-based PCE had been released with personal income data, several days after the GDP report.
While inflation concerns have been mounting in recent months, economists said sharp hikes in energy prices took much of the blame -- and may dissipate in the long term.
"A lot of it is still energy and it does seem that inflation may temper down going into the second quarter, but the first quarter certainly had a bit an upside surprise to inflation and the revisions have shown that growth was not perhaps as good in underlying terms," said Ian Morris, chief economist at HSBC Securities.
In its final snapshot of the first-quarter economy, the department said after-tax corporate profits rose 2.1 percent from the fourth quarter, a sharp upward revision from the 1.4 percent reported a month ago. Still, the profit climb was well below the 7.6 percent rise notched in the final three months of 2003.>
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