WASHINGTON (Reuters) – Economic growth braked sharply in the first quarter as higher food and gasoline prices dampened consumer spending and sent inflation rising at its fastest pace in 2-1/2 years.
Another report on Thursday showed a surprise jump in the number of Americans claiming unemployment benefits last week, which could cast a shadow on expectations for a significant pick-up in output in the second quarter.
Growth in gross domestic product slowed to a 1.8 percent annual rate after a 3.1 percent fourth-quarter pace, the Commerce Department said. Economists had expected a 2 percent pace.
With much of the pull back traced back to sharp cuts in defense spending and harsh winter weather, analysts were hopeful the economy would regain speed in the second quarter. The drop in defense spending was seen as temporary.
"Growth was disappointing given the momentum of the economy heading into the year. We are still of the belief that the economy will improve out of the soft patch through this quarter into the second half of the year," said Brian Levitt, an economist at OppenheimerFunds in New York.
Economists were encouraged that details of the report, in particular consumer spending and business outlays on software and equipment, were not as weak as they had feared and said this suggested a foundation for stronger growth was in place.
Consumer spending accounts for about 70 percent of U.S. economic activity.
LABOR MARKET WEAKNESS?
While a 25,000 rise in claims for state jobless benefits to 429,000 last week hinted at some weakening in the labor market, analysts cautioned against reading too much into gain. They said severe weather in some parts of the country and the Easter holiday could have distorted the figure.
Still, the data suggested improvements in the labor market were still only coming grudgingly.
"The underlying downtrend in initial claims that had been in place since late last year has flattened out," said Omair Sharif, an economist at RBS in Stamford, Connecticut. But he added: "It seems a little too early to suggest that the underlying pace of layoffs has picked up."
Hiring accelerated in March and a report next week is expected to show job creation remained relatively robust in April.
MODERATE PACE
Prices for U.S. government debt rose after the data, while stocks edged lower. The weak GDP report and the Federal Reserve's stated commitment to a loose monetary policy stance after a two-day meeting on Wednesday kept the dollar near a three-year low against a basket of currencies.
The Fed on Wednesday trimmed its growth estimate for 2011 to between 3.1 and 3.3 percent from a 3.4 to 3.9 percent January projection.
Some economists felt the U.S. central bank's estimates might be a little optimistic, given the poor start to the year even though most agreed growth would soon strengthen.
Optimism the economy would find a firmer footing in the second quarter was bolstered by a report showing pending sales of previously owned homes rose 5.1 percent in March. Housing is struggling to recover and is one of the headwinds facing the economy.
Growth in the first quarter was curtailed by a sharp pull back in consumer spending, which expanded at a rate of 2.7 percent after a strong 4 percent rise in the fourth quarter.
Rising commodity prices meant consumers had less money to spend on other items. Gasoline prices remain a concern, even though they are expected to stabilize somewhat.
INFLATION RISING
The GDP report underscored the pain that strong food and gasoline prices are inflicting on households.
A inflation gauge contained in the report rose at a 3.8 percent rate -- the fastest pace since the third quarter of 2008 -- after increasing 1.7 percent in the fourth quarter.
A core price gauge, which excludes food and energy costs, accelerated to a 1.5 percent rate -- the fastest since the fourth quarter of 2009 -- from 0.4 percent in the fourth quarter. The core gauge is closely watched by Fed officials, who would like to see it closer to 2 percent.
In the first quarter, restocking by businesses picked up, with inventories increasing $43.8 billion after a $16.2 billion rise in the fourth quarter. However, the buildup was less than economists had expected and some said they looked for further inventory building to bolster growth in the second quarter.
Inventories added 0.93 percentage point to first-quarter GDP growth. Excluding inventories, the economy grew at a pedestrian 0.8 percent pace after a brisk 6.7 percent rate in the fourth quarter.
Business spending on equipment and software gained pace, but government spending suffered its deepest contraction since the fourth quarter of 1983.
Home building made no contribution, while investment in nonresidential structures dropped at its quickest pace since the fourth quarter of 2009, likely the result of bad weather.
(Additional reporting by Mark Felsenthal; Editing by Neil Stempleman)
-------------------- It isn't so much that liberals are ignorant. It's just that they know so many things that aren't so.
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Right now the key is Oil and Food. If Oil stays at this level or increase, as some predict, for any length of time, we will have some major economic consequences, IMO.
Food prices are going to continue to rise due to crop failures around the world coupled with the cost of petro......that goes into delivery trucks, fertilizers, etc....ad nauseum.
Bottom line is that when inflation on essentials (gas and food) start cutting into families disposable income it spells bad times for the economy......
OEM business should start taking a hit pretty soon followed by a brief surge in after market suppliers.....
If Oil continues to increase or stays put.......Major layoffs throughout most sectors within 9 months.
One point of interest.......we could possibly get to test how effective GM was with their restructuring.
-------------------- "The greatest argument against democracy is a five minute conversation with the average voter." (WC)
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dead on rounder, we hit the point here the disposable income was being all used up in '08... we're back, and this time i don't see a drop in costs coming....
it don't look good...
-------------------- Don't envy the happiness of those who live in a fool's paradise.
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quote:Originally posted by rounder1: Right now the key is Oil and Food. If Oil stays at this level or increase, as some predict, for any length of time, we will have some major economic consequences, IMO.
Food prices are going to continue to rise due to crop failures around the world coupled with the cost of petro......that goes into delivery trucks, fertilizers, etc....ad nauseum.
Bottom line is that when inflation on essentials (gas and food) start cutting into families disposable income it spells bad times for the economy......
OEM business should start taking a hit pretty soon followed by a brief surge in after market suppliers.....
If Oil continues to increase or stays put.......Major layoffs throughout most sectors within 9 months.
One point of interest.......we could possibly get to test how effective GM was with their restructuring.
What is really scary is what will the next major event be? 2011 has come in like a lion. Oil going up, the middle east uprising, and the quake-tsunami-meltdown. We are only 4 months into 12 and have seen some historical events. Throw the flooding and recent tornado disasters...its bad.
What if another hurricane plows through the gulf that is strong enough to shut down all oil production? Even before the hurricane would hit, I bet the price would be rising by the dollars per day.
-------------------- It isn't so much that liberals are ignorant. It's just that they know so many things that aren't so.
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The more greenbacks the Fed prints, the dollar is worth less. With oil pegged to the dollar, is it true to say that the Fed is responsible for high oil prices as it takes more dollars to purchase it?
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The banks are still holding most, reinvesting it, not lending much. Fed has to raise interest rates in order to suck it back in. This will be a painfully long process for us all.
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i beleive teh banks are "stocking up" and intend to keep higher reserves, that would be th eFeds attempt to maintains the US dollar as the reserve currency, strong banks must have big cash reserves.
what some people always seem to forget is that economics is relative, and compared to many other countries? we are not in as bad a debt as they are. the major exceptions are China and Russia, and yes even Libya (at 3% of GDP)
Japanese debt to GDP is over 200% and that was before the Tsunami and the reactor meltdown
so by increasing cash reserves at major banks prior to "dumping" dollars onto the market? the banks appear strong...
be prepared to see the dump, it may seem like the end of the world to some, but a weaker dollar means US businesses that want to sell things to other countries can do so, China has been taking advantage of a weak currency for twenty years, and it eems to be working for them
-------------------- Don't envy the happiness of those who live in a fool's paradise.
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Here's what Jim Rogers, co-founder with George Soros of The Quantum Fund, says about the Fed being gone within 10-20 years from when this was recorded in 2008 I believe.
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