First-Quarter Economic Growth Revised Downward

The U.S. economy cooled slightly in the first three months of this year, the government reported today, reversing earlier impressions that the recovery had gained momentum then.

The economy grew at a 3.9 percent seasonally adjusted annual rate in the first quarter of this year, a slowdown from the 4.1 percent pace of the previous quarter, the Commerce Department said.

That contrasted with the department's earlier estimates that the nation's output of goods and services, or gross domestic product, had jumped in the first quarter. Commerce initially said in April that first quarter GDP had increased at a 4.2 percent annual rate, and then in May raised the estimate to 4.4 percent.

Those rosier numbers had earlier led economists to believe that economic growth had picked up speed, in part because tax cuts and low interest rates gave consumers more cash to spend.

Instead, the new numbers show that the economy lost a little momentum as it began the year. That was primarily because more of that additional cash was used to pay for imports, rather than American-provided goods and services, than was earlier thought. That means overall demand was still relatively high, but it translated into less business for U.S. companies.

The revised numbers also show that consumers boosted their spending on services and businesses increased their investment spending less than earlier thought.

Inflation also was higher than earlier reported. Consumer prices rose 3.2 percent in the first quarter, a much faster pace than the 1 percent rise in the last quarter of 2003, according to the department's personal consumption expenditure index, a measure linked to GDP.

So-called core prices, which exclude energy and food items, rose 2 percent in the first quarter, a low number but up sharply from the 1.2 percent increase in the preceding three-month period.

The GDP number is frequently revised because, as a broad measure of U.S. economic output, it is based on many sources of information about household, business and government spending that trickle in over several months. The figure becomes gradually more accurate with each revision, providing a picture of the economy akin to a Polaroid photo that develops before your eyes, starting out fuzzy and coming into sharper focus over time. The figures on exports and imports are usually among the last to become available, and can cause the results to vary significantly.

By now, however, the first-quarter GDP number is also a picture of the economy seen through a rear-view mirror, and thus had little effect on financial markets.

"The news was for the first quarter of the year and, as such, was seen as old news," John Canavan, an analyst with Stone & McCarthy Research Associates.

Although the revised figure surprised many Wall Street economists who had based their own estimates on the earlier figures, it did not significantly change their views of how the economy has fared since or is likely to grow in coming months.

Many analysts continue to estimate that the economy is expanding at an annual rate somewhere around 4 percent in the current quarter and is likely to keep to roughly that pace or slow a bit in the second half of the year.

Nor did the revised GDP figure change analysts' predictions that the Federal Reserve will raise its benchmark overnight interest rate to 1.25 percent from 1 percent next week and will indicate that it hopes to raise the rate gradually over time.