Pace of U.S. Growth Drops to 4-Year Low Dollar Falls to Record As Inflation Jumps

Weaker exports and a steady slide in spending on home building helped drag U.S. economic growth to its slowest pace in four years during the first quarter, the Commerce Department reported Friday. Gross domestic product, or GDP, which measures total goods and services output within U.S. borders, increased at a weaker-than- expected annual rate of 1.3 percent in the three months from January through March.

That was a little more than half the 2.5 percent rate in the fourth quarter, and well below the 1.8 percent rate that Wall Street analysts had forecast.

The slow growth was not enough to brake inflation, however. The GDP price index, a statistic closely watched by the Federal Reserve, jumped 4 percent in the first quarter – the biggest increase in 16 years.

The value of the dollar against the euro immediately plummeted to a record low, hurt by the possibility that U.S. interest rates might fall and so make the dollar less attractive to hold than the euro.

The dollar also weakened against most other major currencies, with the Fed’s Trade Weighted Major Currency Dollar index at its lowest level in its 36-year history.

“We are in a dollar bear market,” said Brian Garvey, senior currency strategist at State Street Global Markets in Boston. “The growth dynamics are really working against the dollar.”

But economists said that accelerating inflation could prevent the Fed from cutting interest rates to spur growth, leaving the expansion in the hands of American consumers, whose confidence has been buffeted by higher fuel prices and the decline in the housing market.

“A lot of the drivers in the economy, with the exception of consumer spending, are slowing and holding back growth,” said Kevin Logan, senior market economist at Dresdner Kleinwort in New York. “Given the Fed’s focus on inflation right now, they’re not in a position to stimulate growth. The Fed is on hold in the near term.”

Stock prices reflected the conflicting messages in the report, opening modestly lower in New York. The Dow Jones industrial average and the Standard and Poor’s 500 stock index fell slightly, but the Nasdaq composite gained.

In recent policy statements, the U.S. central bank has signaled its concern about how much the economy is slowing. But it has also been unequivocal in stating that inflation is its primary concern.

The last quarter when growth was weaker was in the first three months of 2003, when GDP expanded at a 1.2 percent rate. At the time, the country was still bouncing back from a recession.

Now, growth has been slowing since late last year under the impact of a hard-hit housing sector, where the rising number of loan defaults is causing builders to scale back their operations until inventories of completed but unsold homes are reduced.

Residential spending shrank by 17 percent in the first quarter after declines of 19.8 percent in the fourth quarter and 18.7 percent in the third quarter of last year. It was the sixth straight quarter in which spending on residential construction contracted.

The Fed’s preferred inflation measure, which is tied to consumer spending and strips out costs of food and energy, rose at a 2.2 percent annual rate, up from a 1.8 percent fourth-quarter gain. Ben Bernanke, the chairman of the Federal Reserve, has said a 1 percent to 2 percent rate is preferable.

The U.S. trade deficit widened to an annual pace of $597.8 billion from $582.6 billion in the fourth quarter. The deficit reduced GDP by 0.52 percentage point.

Still, central bankers have said that they expect the economy to improve in the second half of the year as the effects of the housing slowdown dissipate and businesses regain confidence and resume investing.

“I think the economy is decent,” the chief executive of General Electric, Jeffrey Immelt, said before the company’s annual shareholder meeting in Greenville, South Carolina, this week. “I think housing is a tough spot, but the rest of the economy is pretty good.”

Not all economists considered the report on Friday bad news. A gain in business investment and a smaller increase in inventories improved the outlook for this quarter.

“The composition of GDP bodes well for a mild rebound,” said Nariman Behravesh, chief economist at Global Insight in Lexington, Massachusetts, and the only analyst to accurately forecast the growth rate last quarter.

“The gain in capital spending is very good news and inventories are a smaller drag,” he said. “It does look like we are bottoming out. It’s fair to say that the first quarter was probably the low point.”

(c) 2007 International Herald Tribune. Provided by ProQuest Information and Learning. All rights Reserved.