Economic growth slows, inflation surges

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Economic growth slows, inflation surges

Post by Dr. Manhattan on Thu Apr 28, 2011 12:42 pm

Economic growth slows, inflation surges

By Lucia Mutikani Lucia Mutikani – 1 hr 43 mins ago

WASHINGTON (Reuters) – U.S. economic growth braked sharply in the first quarter as higher food and gasoline prices dampened consumer spending, and sent a broad measure of inflation rising at its fastest pace in 2-1/2 years.

Another report on Thursday showed a surprise rise in the number of Americans claiming unemployment benefits last week, which could cast a shadow on expectations for a significant pick-up in output in the second quarter.

Growth in gross domestic product slowed to a 1.8 percent annual rate after a 3.1 percent fourth-quarter pace, the Commerce Department said. Economists had expected a 2 percent growth pace.

Output was also restrained by harsh winter weather, which depressed construction, rising imports and the biggest drop in government spending in more than 27 years amid sharp cut backs in defense spending.

Though consumer spending took a step back, it did not slow as much as economists had feared, leaving many still hopeful of a re-acceleration in the growth pace in the second quarter.

"We are encouraged that the main sources of weakness -- declines in structures investment and defense spending -- are generally supportive of our view that temporary factors played a significant role and that growth will rebound in the second quarter," said Peter Newland, an economist at Barclays Capital in New York.

But with initial claims for state jobless benefits jumping 25,000 to a seasonally adjusted 429,000 last week, there is need to the cautious. Claims were the highest since late January and economists had expected them to slip to 392,000.

The Federal Reserve on Wednesday acknowledged the slowdown in first-quarter growth, describing the recovery as proceeding at a "moderate pace" -- a slight step back from a statement in March when it said the economy was on a "firmer footing."

It trimmed its growth estimate for 2011 to between 3.1 and 3.3 percent from a 3.4 to 3.9 percent January projection.

The U.S. central bank signaled it was in no rush to start withdrawing the massive monetary stimulus it has lent the economy. It confirmed plans to complete its $600 billion bond buying program in June.

Prices for U.S. government debt rose after the data, while stocks edged lower. The weak GDP report and the Federal Reserve's commitment to a loose monetary policy stance drove the dollar to a three-year low against a basket of currencies.

A third report showed pending sales of previously owned homes rose by a stronger than expected 5.1 percent in March, pointing to an improvement in sales. The housing market is struggling to recover and is one of the headwinds facing the economy.

Growth in the first quarter was curtailed by a sharp pull back in consumer spending, which expanded at a rate of 2.7 percent after a strong 4 percent gain in the final three months of 2010.

Rising commodity prices meant the consumers, which drive about 70 percent of U.S. economic activity, had less money to spend on other items. The report also underscored the pain that strong food and gasoline prices are inflicting on households.

A broad measure of inflation, the personal consumption expenditures price index, rose at a 3.8 percent rate -- its fastest pace since the third quarter of 2008 -- after increasing 1.7 percent in the fourth quarter.

The core index, which excludes food and energy costs, accelerated to a 1.5 percent rate - the fastest since the fourth quarter of 2009 -- from 0.4 percent in the fourth quarter. The core gauge is closely watched by Fed officials, who would like it around 2 percent.

In the first quarter, growth was also curbed by imports which rebounded as businesses rebuild inventories. Export growth, however, slowed.

Restocking by businesses picked up, with inventories increasing $43.8 billion after a $16.2 billion rise in the fourth quarter. Inventories added 0.93 percentage point to GDP growth. Excluding inventories, the economy grew at a pedestrian 0.8 percent pace, reflecting important pockets of weakness, after a brisk 6.7 percent rate in the fourth quarter.

Business spending on equipment and software gained pace from the prior quarter, but government spending contracted at its fastest pace since the fourth quarter of 1983.

Home building made no contribution, while investment in nonresidential structures dropped at its quickest pace the fourth quarter of 2009. However, motor vehicle output added 1.4 percentage point to economic growth last quarter.

(Additional reporting by Mark Felsenthal; Editing by Neil Stempleman)

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Dr. Manhattan

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