Economic Growth Slows But Beats Expectations

A Sears employee shows a clothes washer to shoppers in New Jersey. Durable goods orders rose in April by the most in five months.
A Sears employee shows a clothes washer to shoppers in New Jersey. Durable goods orders rose in April by the most in five months. (By Daniel Acker -- Bloomberg News)
By Nell Henderson
Washington Post Staff Writer
Friday, May 27, 2005

Although the U.S. economic expansion slowed early this year, it remained on firm ground, according to government figures reported yesterday. The data confirmed that the recent surge in energy costs dampened consumer spending less than once believed.

The country's gross domestic product, the value of all goods and services produced, rose at a solid 3.5 percent annual rate in the first three months of the year, the Commerce Department reported, revising upward its earlier estimate of a 3.1 percent pace -- a difference worth $10.6 billion in an $11 trillion economy.

The new figures still mean the expansion slowed from its 3.8 percent annual rate of growth in the final three months of 2004 and its 4 percent pace in the third quarter.

The earlier first-quarter estimate, 3.1 percent, indicated that the economy had grown at its weakest pace in two years, which many economists attributed to the winter surge in energy costs. That figure left analysts divided over whether the economy had hit a brief soft patch or was headed into a more prolonged period of sluggishness.

Since then, new data have made clear that the economy was growing at a fine clip in the first quarter. And the expansion appears to have gained momentum since then, with energy costs falling and hiring, retail sales and housing starts all rising faster in April.

Together, the recent figures reinforce analysts' expectations that the Federal Reserve will keep raising interest rates in coming months to keep inflation contained.

"The very modest slowdown in economic activity over the past two quarters is likely to continue through" the spring and perhaps the summer, Joe Liro, an economist with Stone & McCarthy Research Associates, wrote in an analysis for clients. "But we view it, as does the Federal Reserve, as a temporary, transitional deceleration which leaves growth on a still healthy path."

Fed officials had strongly suspected that the sudden economic weakness in March would probably pass. But they were not sure, according to minutes of their most recent policymaking meeting May 3. At the time, they had several figures for March but no data measuring the trade gap, and they did not yet have the stronger April numbers.

Thinking the risks of higher inflation outweighed the risks of slower growth, the Fed's top policymaking group raised its key short-term interest rate by another quarter of a percentage point, to 3 percent, and signaled that more increases are likely.

The GDP report confirmed that the Fed's preferred measure of consumer inflation rose in the first quarter to a level higher than officials want. Consumer prices for items other than food and energy rose at a 2.2 percent annual rate in the first quarter, up from a 1.7 percent rate of increase in the previous quarter, according to the Commerce Department's core personal consumption expenditure index.

Fed officials have not explicitly set a target for the measure but have indicated they would be most comfortable if it stayed in the range of 1.5 percent to 1.75 percent.

The biggest reason for the upward revision to first-quarter GDP was that the early estimate was made before the country's March trade deficit had been reported. The gap turned out to be smaller than projected, narrowing to $55 billion from $60.6 billion in February. That means more demand was satisfied by goods made in the United States than previously thought, boosting GDP.

The booming housing industry also contributed to the rosier number. Residential investment rose at an 8.8 percent annual rate in the first quarter, up from the 5.7 percent estimated earlier and more than double the 3.4 percent rate of the fourth quarter. All the quarterly numbers are adjusted for inflation and seasonal variation.

High energy costs did appear to take some toll. Consumer spending slowed early this year, rising at a 3.6 percent annual rate in the first quarter, down from the 4.2 percent gain in the fourth quarter.

Business investment also slowed more than had been estimated. Spending on factories, equipment and software rose at a 3.5 percent annual rate, well below the 4.7 percent earlier estimated and sharply down from the double-digit gains of the previous three quarters.

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