Economy has worst showing in 4 years

The Baltimore Sun

The U.S. economy hit the skids in the first quarter, posting its worst growth rate in four years. But the continued spending of consumers and business people has many experts predicting better times ahead.

The slumping housing market was named as a primary culprit in a Commerce Department report yesterday showing that the nation's gross domestic product grew at a surprisingly sluggish 1.3 percent annual rate in the January-March quarter, the lowest pace since the first quarter of 2003. That compared to the 2.5 percent growth in last year's fourth quarter, and the 3 percent pace considered to be par for the U.S. economy during expansions.

Spending on housing fell 17 percent in the first quarter, according to the report. Business spending, which showed an outright decline in the fourth quarter because corporate buyers have turned cautious about the economy's future direction, showed a 1.9 percent increase in the first quarter. While that was slightly stronger than expected, such a rate of capital spending is still weak by historical measures.

The GDP data show the economy "slowing to stall speed," said Northern Trust economist Paul L. Kasriel.

In fact, GDP growth hasn't been this weak since the United States was preparing to invade Iraq.

Economists usually figure that the economy's natural rate of growth is about 3 percent; when it exceeds that level, it is said to be "above trend," and when it falls below 3 percent, as it has for the past four quarters, it is said to be "below trend."

Over the past 12 months, GDP has grown at only 2.1 percent; that weak spell was preceded by 13 quarters of above-trend growth.

But many economists expect businesses and consumers to offset the drag of the housing market, leading to rebounding growth the rest of this year.

"It is easy to see the glass as half-empty, but we have likely seen the worst of things," said University of Maryland business professor Peter Morici. "Consumer spending and stronger business investment will likely raise growth for the balance of the year."

With many stock market indexes setting all-time highs, Wall Street also appears to see better times ahead. Strong gains in stock prices in recent weeks, despite weak economic data, suggest that investors are confident the economy won't fall into recession, analysts say.

That view also has been reinforced by better-than-expected first-quarter earnings reports from many big U.S. companies, including Microsoft Corp., Caterpillar Inc. and 3M Co.

The stock market largely took the weak growth report in stride yesterday. The Dow Jones industrial average edged up to another record high, adding 15.44 points to 13,120.94.

If investors and analysts are right about the economy reviving, the first-quarter slump could be a part of a "mid-cycle slowdown" similar to that of the mid-1990s. Then, the economy slowed after a series of Federal Reserve interest rate increases but avoided recession. The economy and stock market then rebounded, racking up one of the strongest booms ever in the late 1990s.

Nariman Behravesh, chief economist at research firm Global Insight, predicted that economic growth will accelerate to between 2.5 percent and 3 percent this year. Morici looks for growth of 3 percent in the second half.

But not everyone is so optimistic. Some analysts say growth won't pick up much and could decline further, pointing to the housing slump and the inflationary pressures of high energy prices.

A price indicator favored by the Federal Reserve - personal consumption expenditures excluding food and energy items - rose at a 2.2 percent annual rate in the first quarter, up from 1.8 percent in the final three months of 2006.

Adding to the bearish case was consumer confidence, which has fallen 10 percent since the start of the year. It dropped again this month, albeit by less than in earlier months, according to a report released yesterday. The Reuters and University of Michigan index of consumer sentiment fell to 87.1 in April, just below the 88.4 March level and nearly identical to the 87.4 reported last April.

Thankfully, the optimists said, consumer spending grew 3.8 percent in the first quarter, and business spending gained 2 percent.

Lisa Girion writes for the Los Angeles Times, and James P. Miller writes for the Chicago Tribune. Times reporters Tom Petruno and Michelle Quinn contributed to this article.

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