Originally created 06/26/04

Economy slows to a 3.9 percent pace in first quarter



WASHINGTON -- Economic growth in the first quarter was slower than first reported - at an annual rate of 3.9 percent - a pace that was solid but lacking the momentum exhibited as the calendar turned to 2004.

The new reading on the gross domestic product (GDP), reported by the Commerce Department Friday, wasn't as brisk as the 4.4 percent growth rate previously estimated for the quarter starting Jan. 1 and ending March 31. It was slightly slower than the 4.1 percent pace registered in the final quarter of 2003.

The GDP measures the value of all goods and services produced within the United States. The lower reading was likely to disappoint economists, who predicted that the first quarter figure would remain at the previous estimate of a 4.4 percent growth rate.

The downward revision to economic growth reflected a drag from the swollen trade deficit and more modest spending by consumers, the lifeblood of the economy.

The 3.9 percent growth rate, while the slowest pace since the second quarter of 2003, was still considered healthy, economists said.

"That is a sturdy rate of growth. The economy is very strong but is not barreling along at the pace that we thought it was," said Mark Zandi, chief economist at Economy.com. "Global competition is taking market share from domestic companies, thus the broader U.S. economy is growing a bit less quickly than expected."

Some analysts say economic growth in the current April-to-June quarter could be restrained by higher energy prices, which could crimp consumer and business spending. Second-quarter economic growth estimates range from a 3.5 percent pace to just more than 4.5 percent.

Under either of those scenarios, growth would be sufficient to continue generating jobs and keep the economy on track for a projected 4.7 percent gain in GDP for all of 2004. Such a figure would mark the strongest showing in 20 years, analysts say.

Against this backdrop, economists widely expect the Federal Reserve policy-makers to boost short-term interest rates for the first time in four years when they meet next week. The Fed's main short-term rate used to adjust monetary policy has been at 1 percent - a 46-year low - for a year. Most economists are forecasting a one-quarter percentage point increase.

Zandi said the latest GDP figure would reinforce Fed policy-makers' belief that any rate increases can be gradual.

While politicians often don't like the prospects of higher interest rates, they also want the economy - and particularly inflation - to be kept on an even keel.

An inflation gauge tied to the GDP report showed that core prices - excluding food and energy - rose at a 2 percent rate in the first quarter, up from a 1.2 percent pace in the fourth quarter - suggesting that inflation - while low by historical standards - is clearly on the rise.

President Bush and Democratic presidential candidate John Kerry - trying to woo voters - have sparred over economic, jobs and trade issues. Although the jobs climate is improving, payroll jobs are still down by 1.2 million from where they stood when he took office in January 2001.

Kerry points to that as evidence that Bush's economic policies aren't working. But Bush, citing a string of monthly job gains, says they are. He says the best way to spur job creation is by making the economy stronger.

In the GDP report, consumer spending in the first quarter rose at a 3.8 percent annual rate. That was down slightly from a 3.9 percent growth rate previously estimated for the quarter but up from a 3.2 percent pace seen in the fourth quarter. Consumers cut back on big-ticket purchases, such as cars and appliances, in the first quarter.

Businesses boosted spending on equipment and software in the first quarter at a rate of 9.2 percent. That was down from a previous estimate for the quarter and slower than the 14.9 percent growth rate in the fourth quarter.

The yawning trade deficit, meanwhile, shaved 0.7l percentage point off the first-quarter GDP - twice as much as previously estimated.