The US economy weakened dramatically in the first quarter to its worst growth pace in four years, expanding at a clip of just 1.3 percent, new government figures showed Friday.
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Core prices, excluding food and energy costs, were up 2.2 percent.
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Stagflation?????
US economic clouds darken by Justin Cole
The US economy weakened dramatically in the first quarter to its worst growth pace in four years, expanding at a clip of just 1.3 percent, new government figures showed Friday.
A housing slump dragged the world's biggest economy down sharply from its annualized 2.5-percent pace in the prior quarter.
And although economists expect growth to rebound this year, they caution that a turnaround will largely depend on whether the housing market can get back on its feet.
The first snapshot of 2007 growth, which is likely to be revised in coming months, dashed the hopes of most analysts who had chalked up growth projections of at least 1.8 percent.
The euro leapt to a record high against the greenback of 1.3682 dollars in the immediate aftermath of the report's release as fears mounted about America's economic health.
Wall Street seemed to shake off the fears, however, as the Dow Jones Industrial Average closed at a record high amid soaring corporate profits.
Economists generally do not expect US growth to worsen, however. Lehman Brothers sees growth accelerating to around 2.5 percent later this year, as do other analysts.
"We believe that, during the first quarter, the economy hit the low point of this cycle. We expect that in the second half economic growth will gradually accelerate to a rate of 2.5 to 3.0 percent," said Nariman Behravesh, a chief economist at Global Insight.
"We see neither a pronounced period of weakness nor an explosive rebound over the remainder of the year," said Joseph Liro, an economist at Stone McCarthy Research Associates.
Analysts said the bulging US trade deficit, which is especially pronounced with fast-growing China, and the housing market downturn conspired to hobble growth.
But there are economic bright spots, corporate profits have swelled and the job market is tight.
GDP growth hit the brakes in the January-March period as exports fell 1.2 percent while imports rose 2.3 percent. Growth stumbled to its weakest quarterly rate since the first quarter of 2003 when America launched a war to topple former Iraqi leader Saddam Hussein.
Rising demand for imported goods can dent domestic growth, especially if Americans buy more foreign-made Toyotas and Hondas than Detroit-made autos.
Housing investment was a major drag on growth, falling for a sixth straight quarter, by 17 percent compared with a year earlier.
Liro said growth will not be resuscitated until the glut of homes for sale is depleted.
And despite worries about consumer spending, which accounts for the lion's share of economic growth, consumers appear to be happily splurging.
Consumer spending rose 3.8 percent in the quarter, although spending slowed from a 4.2 percent pace in the previous quarter.
"US consumers are still the main drivers of growth in the US economy," said Drew Matus, a Lehman Brothers economist.
Purchases of big-ticket durable goods like cars, washing machines and televisions surged 7.3 percent.
Inflation signals may concern the Federal Reserve, however, as a key gauge of prices shot up 3.4 percent, following a one percent gain in the final three months of 2006.
Core prices, excluding food and energy costs, were up 2.2 percent.
The Fed has held its key fed funds interest rate steady since June, and is walking a tight rope as it seeks to sustain growth without letting inflation rocket.
Raising rates may cool inflationary pressures, but would also likely deepen the gloom in the housing market, while cutting rates could give relief to home owners, but worsen inflation.
The Fed next meets on May 9 and analysts expect it to hold the fed funds rate at 5.25 percent.
"There's not really anything in this report that assures a rate cut in the second half of this year," said John Lonski, chief economist at Moody's Investors Service.
Behravesh supported Lonski's perspective.
"Given this outlook and the fact that core inflation remains stubbornly above two percent, we do not expect the Fed to cut rates anytime soon," he added. |
