U.S. economic growth slowed sharply in the first three months of the year, to the weakest pace in two years, as surging energy costs caused...
WASHINGTON — U.S. economic growth slowed sharply in the first three months of the year, to the weakest pace in two years, as surging energy costs caused consumers and businesses to rein in their spending.
The nation’s gross domestic product, which is the value of all goods and services produced, rose at a 3.1 percent annual rate during the first quarter, down from a 3.8 percent rate in the final three months of last year, the Commerce Department said yesterday.
The news confirmed other recent signs of a cooling economy. Job growth, retail sales, factory production and consumer confidence fell in March. New orders for big-ticket manufactured goods have declined in each of the past three months. The trade deficit keeps growing to new monthly records.
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Many analysts were surprised the economy had slowed so quickly after expanding 4.4 percent last year, but they said the nation isn’t headed back into recession — as long as energy prices don’t go higher.
“I think we have to get used to slower growth numbers,” said Nigel Gault, U.S. economist at Global Insight, an economic research and forecasting firm.
Stock prices fell after the report was released, as many analysts lowered their forecasts of economic growth for the months ahead. The Dow Jones industrial average lost 128.43 to 10,070.37.
The Fed is still likely to raise its benchmark overnight rate at its meeting Tuesday to 3 percent from 2.75 percent. Several analysts predicted that the central bank will raise the rate by another quarter-percentage point in June, and by a similar amount at two or three more meetings this year.
But several Fed officials believe inflation is contained for now and that energy prices are likely to fall in coming months. If they’re right, and growth remains subdued, they may consider leaving rates unchanged at their June meeting.
“With consumption suffering from the strength of gasoline prices and investment apparently stalling too, the chances are rising that the Fed will need to change course and stop raising rates,” said Paul Ashworth, senior international economist with Capital Economics, a financial consultancy. “However, for the moment, we expect it to continue raising rates at a measured pace for the next couple of meetings.”
The economy has slowed after two years in which growth was boosted by government stimulus — in the form of tax cuts and low interest rates — provided in response to extraordinary turmoil.
Many economists have now lowered their 2005 growth forecasts to about 3 percent from closer to 4 percent, noting that business inventories are high and interest rates are headed higher.
The first quarter’s 3.1 percent growth rate is equal to the nation’s quarterly average for the past two decades, and “isn’t a bad thing,” said Richard Yamarone, director of economic research for Argus Research.
Others disagreed. Growth at 3 percent “is slow” for this country and will create “huge challenges for our society,” said John Silvia, chief economist at Wachovia Securities. “It’s below what we’ve budgeted for fiscal policy. It’s below our expectations for the job market.”