Economy at Its Slowest in 4 Years (NYTimes, 4/28/07)
April 28, 2007
Economy at Its Slowest in 4 Years
By EDUARDO PORTER and JEREMY W. PETERS
Economic growth slowed to its weakest pace in four years during the first three months of 2007, underscoring how the persistent slump in the housing market continued to serve as a drag on the American economy.
In its first estimate of economic growth for the quarter, the Commerce Department said the nation gross domestic product, the most comprehensive measure of overall economic activity, expanded 1.3 percent for the quarter, barely over half the rate recorded in the final quarter of last year.
The abrupt slowdown was not enough to put a brake on inflation, however. The consumer price index most carefully monitored by the Federal Reserve, which excludes food and energy, rose 2.2 percent in the quarter, at an annual rate, above the Fed stated comfort ceiling.
t sort of more inflation, less growth,?said Stuart Hoffman, chief economist of PNC Financial. hat not a tasty combination.?/p>
On Wall Street, economists had forecast a slide in growth, but not one this sharp. The dollar plunged against the euro, briefly falling to a record low as investors factored in expectations of faster growth and rising interest rates in Europe against low growth and the possibility of lower rates in the United States.
But bond yields rose slightly, indicating deeper concern about potentially higher inflation. Stocks ?which have risen almost uninterruptedly since early March, defying concerns over a potential economic weakening ?ended mixed.
Economists said that the latest report card left the Fed in even more of a quandary over interest rates, with a weaker economy prodding it to cut rates to stimulate growth but inflationary pressures pushing it toward higher rates to curb price increases. The end result is likely to be a decision by the central bank to keep rates where they are until a clearer picture emerges.
t a bugaboo for the Fed,?said John Silvia, chief economist at the Wachovia Corporation, the bank holding company. t is a difficult spot to be in.?/p>
As throughout much of last year, the housing slump was the biggest anchor on the economy. Home construction recorded its sixth consecutive quarterly decline, falling 17 percent at an annual rate and subtracting almost a full percentage point from G.D.P.
Still, there were several upbeat signals in the economic report that suggested to many economists that the pace of growth could pick up this year. Business investment rebounded from its slowdown late last year to expand at a 2 percent annual rate in the first quarter. Silicon Valley was a key to the revival: investment in information technology contributed more than half a percentage point to growth in the quarter.
And despite the worrisome state of housing, Americans continued to borrow and buy. In the first quarter consumer spending grew 3.8 percent, a fairly vigorous pace.
But economic weakness also spread beyond housing. After a sharp cut in inventories in the fourth quarter of last year, businesses slimmed their stockpiles a little more in the first quarter of 2007, shaving 0.3 percentage points from economic growth. A decline in military spending by the government trimmed a quarter of a percentage point percent from total output.
Trade provided the biggest surprise, when exports fell unexpectedly and imports continued growing, subtracting half a percentage point from economic growth, according to the report.
Economists pointed out that the preliminary data on trade is particularly sketchy because the government did not yet have a good handle on exports and imports in March. But the data bewildered some analysts, who pointed out that the combination of a weak dollar and faster growth in Europe and elsewhere should be providing a lift to exports.
e completely discount this number,?said Nariman Behravesh, chief economist at Global Insight of Lexington, Mass. t inconsistent with everything else going on in the world.?
He suggested the estimate for first-quarter exports could be revised upward. And if not, he predicted, exports should record a sharp upswing in the spring quarter that is under way now.
The weakness in the economy and the poor trade results contributed to the dollar rout early in the trading day. And some analysts on foreign exchange markets argued that the dollar could well continue its long fall against key currencies like the euro and the British pound.
he divergence in monetary policy and economic growth between Europe and the U.S. is going to grease the wheels of those central banks who want to diversify their reserves away from the U.S. dollar,?said Ashraf Laidi, chief foreign exchange analyst at CMC Markets U.S., a financial trading company.
And a number of economists noted several reasons for the expected slow growth in coming quarters. The main one is the possibility of weaker consumer spending.
apidly rising energy prices and falling consumer confidence suggest that consumption growth will slow markedly in the second quarter,?Paul Ashworth, senior United States economist with Capital Economics, wrote in a research report.
Moreover, some experts forecast that the relatively strong job market of recent months ?unemployment has fallen to 4.4 percent and wage gains have outpaced inflation despite weak growth ?will buckle soon and kink consumer spending.
rowth at this pace will loosen the labor market,?wrote Ian Shepherdson, chief United States economist at High Frequency Economics in Valhalla, N.Y., in a note to investors. he Fed will blink soon.?/p>
But traders who try to divine the Fed actions were unmoved by the latest data. Futures markets put the chance that the Fed will cut interest rates from 5.25 percent to 5 percent by the end of the year at around 90 percent, about the same as before the new data was released.
Mr. Behravesh suggested Fed governors seem confident that the economy is growing at an underlying, long-term rate of 2 to 2.5 percent, a rate at which they are comfortable.
Some economists even suggested that higher inflation might prompt the Fed to raise, not cut, interest rates.
he Fed has seen inflation numbers creep steadily up in this cycle,?said Michael R. Englund, chief economist of Action Economics in Denver. ee going to see a first half of the year that is going to keep inflation pretty much above the Fed target zone.?/p>
Economy at Its Slowest in 4 Years
By EDUARDO PORTER and JEREMY W. PETERS
Economic growth slowed to its weakest pace in four years during the first three months of 2007, underscoring how the persistent slump in the housing market continued to serve as a drag on the American economy.
In its first estimate of economic growth for the quarter, the Commerce Department said the nation gross domestic product, the most comprehensive measure of overall economic activity, expanded 1.3 percent for the quarter, barely over half the rate recorded in the final quarter of last year.
The abrupt slowdown was not enough to put a brake on inflation, however. The consumer price index most carefully monitored by the Federal Reserve, which excludes food and energy, rose 2.2 percent in the quarter, at an annual rate, above the Fed stated comfort ceiling.
t sort of more inflation, less growth,?said Stuart Hoffman, chief economist of PNC Financial. hat not a tasty combination.?/p>
On Wall Street, economists had forecast a slide in growth, but not one this sharp. The dollar plunged against the euro, briefly falling to a record low as investors factored in expectations of faster growth and rising interest rates in Europe against low growth and the possibility of lower rates in the United States.
But bond yields rose slightly, indicating deeper concern about potentially higher inflation. Stocks ?which have risen almost uninterruptedly since early March, defying concerns over a potential economic weakening ?ended mixed.
Economists said that the latest report card left the Fed in even more of a quandary over interest rates, with a weaker economy prodding it to cut rates to stimulate growth but inflationary pressures pushing it toward higher rates to curb price increases. The end result is likely to be a decision by the central bank to keep rates where they are until a clearer picture emerges.
t a bugaboo for the Fed,?said John Silvia, chief economist at the Wachovia Corporation, the bank holding company. t is a difficult spot to be in.?/p>
As throughout much of last year, the housing slump was the biggest anchor on the economy. Home construction recorded its sixth consecutive quarterly decline, falling 17 percent at an annual rate and subtracting almost a full percentage point from G.D.P.
Still, there were several upbeat signals in the economic report that suggested to many economists that the pace of growth could pick up this year. Business investment rebounded from its slowdown late last year to expand at a 2 percent annual rate in the first quarter. Silicon Valley was a key to the revival: investment in information technology contributed more than half a percentage point to growth in the quarter.
And despite the worrisome state of housing, Americans continued to borrow and buy. In the first quarter consumer spending grew 3.8 percent, a fairly vigorous pace.
But economic weakness also spread beyond housing. After a sharp cut in inventories in the fourth quarter of last year, businesses slimmed their stockpiles a little more in the first quarter of 2007, shaving 0.3 percentage points from economic growth. A decline in military spending by the government trimmed a quarter of a percentage point percent from total output.
Trade provided the biggest surprise, when exports fell unexpectedly and imports continued growing, subtracting half a percentage point from economic growth, according to the report.
Economists pointed out that the preliminary data on trade is particularly sketchy because the government did not yet have a good handle on exports and imports in March. But the data bewildered some analysts, who pointed out that the combination of a weak dollar and faster growth in Europe and elsewhere should be providing a lift to exports.
e completely discount this number,?said Nariman Behravesh, chief economist at Global Insight of Lexington, Mass. t inconsistent with everything else going on in the world.?
He suggested the estimate for first-quarter exports could be revised upward. And if not, he predicted, exports should record a sharp upswing in the spring quarter that is under way now.
The weakness in the economy and the poor trade results contributed to the dollar rout early in the trading day. And some analysts on foreign exchange markets argued that the dollar could well continue its long fall against key currencies like the euro and the British pound.
he divergence in monetary policy and economic growth between Europe and the U.S. is going to grease the wheels of those central banks who want to diversify their reserves away from the U.S. dollar,?said Ashraf Laidi, chief foreign exchange analyst at CMC Markets U.S., a financial trading company.
And a number of economists noted several reasons for the expected slow growth in coming quarters. The main one is the possibility of weaker consumer spending.
apidly rising energy prices and falling consumer confidence suggest that consumption growth will slow markedly in the second quarter,?Paul Ashworth, senior United States economist with Capital Economics, wrote in a research report.
Moreover, some experts forecast that the relatively strong job market of recent months ?unemployment has fallen to 4.4 percent and wage gains have outpaced inflation despite weak growth ?will buckle soon and kink consumer spending.
rowth at this pace will loosen the labor market,?wrote Ian Shepherdson, chief United States economist at High Frequency Economics in Valhalla, N.Y., in a note to investors. he Fed will blink soon.?/p>
But traders who try to divine the Fed actions were unmoved by the latest data. Futures markets put the chance that the Fed will cut interest rates from 5.25 percent to 5 percent by the end of the year at around 90 percent, about the same as before the new data was released.
Mr. Behravesh suggested Fed governors seem confident that the economy is growing at an underlying, long-term rate of 2 to 2.5 percent, a rate at which they are comfortable.
Some economists even suggested that higher inflation might prompt the Fed to raise, not cut, interest rates.
he Fed has seen inflation numbers creep steadily up in this cycle,?said Michael R. Englund, chief economist of Action Economics in Denver. ee going to see a first half of the year that is going to keep inflation pretty much above the Fed target zone.?/p>
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