Growth revised lower, inflation higher
By Rex Nutting, MarketWatch
Last Update: 11:43 AM ET July 29, 2005
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WASHINGTON (MarketWatch) - The U.S. economy was weaker over the past three years than previously estimated, while inflation was moderately higher, the Commerce Department said Friday.
Instead of growing at a 3.1% annual rate in the three years from 2002 through 2004, the economy actually grew at a 2.8% pace, the government said.
The government also reported Friday that gross domestic product increased at a 3.4% in the second quarter of 2005. See full story.
A downward revision for investment in information technology equipment and software was the major cause of the weaker growth estimate.
The revised data show the recovery since the recession of 2001 was weakest in the post-World War II era.
Inflation
At the same time, inflation was a bit hotter than previously thought, especially in 2004. The closely followed core personal consumption expenditure price index rose at a 1.7% annual pace in the three years, rather than the 1.4% earlier estimated.
In 2004, the core PCE price index was revised from 1.5% to 2%, at the top of the Federal Reserve's 1.5%-2% comfort zone for inflation.
Through the second quarter, the core PCE price index has increased 2% in the past year, down from 2.2% year-over-year growth in the past two quarters.
"Fed officials will have to take seriously the idea that inflation has moved up somewhat more than they had previously suspected," said Stephen Stanley, chief economist for RBS Greenwich Capital.
The upward revision in inflation was largely due to higher prices for health insurance and financial services.
However, a more benign inflation picture emerged from the so-called market-based PCE index, which some analysts say provides a more accurate assessment of the inflation pressures most consumers face. The market-based PCE was unrevised at 2% annualized growth, while the core market-based PCE index was revised up to 1.4% from 1.3%.
In the past year, the core market-based PCE index has increased 1.7%.
The revisions
The major change in the data reflects slower investment in information technology than previously assumed. Most of the revision was in 2003 data, which now show IT investment rising 3.2% rather than 6.4% as earlier reported.
Instead of growing at 1.3% annual for the three years, nonresidential fixed investment increased just 0.2% annually after the revisions.
Consumer spending was also revised lower for the period from 3.4% annual growth to 3.2%.
Personal incomes were revised higher in all three years, largely because of higher compensation and dividend income. The personal savings rate was revised higher in all three years. In 2004, it stood at 1.8%, instead of 1.3% previously.
However, national savings (which includes government, business and personal savings) was revised lower in 2003 and 2004. In both years, national savings fell to 13.4% of GDP.
GDP increased 1.6% in 2002, 2.7% in 2003 and 4.2% in 2004. Through the second quarter, GDP had increased 3.6% year-over-year.
Rex Nutting is Washington bureau chief of MarketWatch.
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