Economic growth slows, inflation surges

Higher food and gas prices are causing a strain on the economy as inflation soars and economic growth continues to slow. The sharp pullback on growth for the first quarter has caused a lot of concern for Americans who are feeling the strain.

By Lucia Mutikani Lucia Mutikani
April 28, 2011
YAHOO! NEWS

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)

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