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Economy drags heels and inflations fears rise { April 29 2005 } Original Source Link: (May no longer be active)
http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2005/04/29/ECONOMY.TMPhttp://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2005/04/29/ECONOMY.TMP
Economy drags its heels in quarter
Slower growth, slipping GDP leave analysts watchful
- Tom Abate, Chronicle Staff Writer
Friday, April 29, 2005
The economy grew at its slowest pace in two years in the first quarter as stockpiles of unsold goods swelled and imports undercut domestic production.
The U.S. gross domestic product -- the total output of goods and services and the broadest measure of overall economic health -- grew at a moderate annual rate of 3.1 percent in the first three months of the year, the Commerce Department reported Thursday.
That was down considerably from the 3.8 percent rate of growth reported at the end of 2004 and lower than the 3.5 percent median forecast of economists for the current quarter.
Experts were generally not alarmed by the slowdown, noting that GDP growth in the 3 percent range is considered healthy. Wachovia Bank economist Mark Vitner noted that the 3.1 percent figure is preliminary and could be raised.
"There's not much chance of a recession in 2005 or 2006," he said.
Nevertheless, economists were concerned by several cautionary signals in the report, suggesting that the economy will be fighting off weakness in coming months rather than operating from a position of strength.
Growth in spending by both consumers and businesses decelerated during the period, a development that probably reflected higher fuel prices, economists said.
The spending slowdown contributed to a steep buildup in inventories. The trade deficit spiked as more spending went to buy foreign-made goods.
Meanwhile, inflation jumped, even after the effects of rising energy and food prices were excluded.
"The apparent sharpness of the slowdown does raise the prospect that second-quarter growth may be even slower than the sub-3 percent we currently envision," Merrill Lynch economist Sheryl King wrote Thursday.
However, one finding in the report should cheer Silicon Valley. Spending on information-processing equipment and software rose at a 21 percent annual rate in the first quarter, while expenditures for computers and peripherals jumped at a 24 percent rate.
"While the GDP report may signal a soft patch for the larger economy, someone forgot to tell that to companies in Silicon Valley," said Mat Johnson, an economist with ThinkEquity Partners in San Francisco.
The GDP number put Wall Street in a bearish mood, as investors ignored a slew of positive earnings reports to push all three major indexes down more than 1 percent.
The Dow Jones industrial average lost 128.43 points to close at 10,070.37. The Nasdaq shed 26.25 points to end the day at 1,904.18. The Standard & Poor's 500 index dipped 13.16 to close at 1,143.22 Thursday.
Economists said the biggest warning in Thursday's report came from the sharp rise in inventories, which accelerated at a rate of 5.7 percent in the first three months of the year.
Citigroup economist Steven Wieting said "the large increase in inventories could easily be a drag in the coming quarter" if producers trim staff or work hours in order to whittle down the mound of goods accumulating in warehouses.
Mark Kane, owner of the Marina Pontiac GMC dealership in San Leandro, said the automotive sector was one place where inventory buildup was visible, at least for sellers of domestic brands like General Motors. "They're stacked up like cordwood," Kane said.
Norbert Ore, who compiles the monthly survey on sales and inventory for the Institute of Supply Management in Phoenix, said his group's gauge shows that future orders are growing, but at a slower pace than in recent quarters.
"There's a good chance that manufacturers can work off these current inventory levels at current demand" without big cutbacks in production or staffing, said Ore, a purchasing manager for a paper products firm.
If inventories continue to build, however, that would be worrisome. "Many recessions are caused by inventory buildup," Ore said.
The nation's trade deficit also exacted a toll. Imports grew twice as fast as exports in the first three months of the year, even though a falling dollar should make U.S. products more attractive abroad. The Commerce Department reported that this flood of imports -- which satisfies demand without boosting domestic production -- shaved nearly 1.5 percent off the GDP.
"Our insatiable demand for imports led to a large widening in the trade deficit, and that slowed growth," said Pennsylvania economist Joel Naroff.
Thursday's report added to concerns that inflationary pressures may be building. An inflation gauge tied to consumer spending -- an indicator closely watched by the Fed -- rose at a 2.2 percent annual rate in the quarter, excluding food and energy prices. In the last quarter of 2004, the same measure rose at a 1.7 percent rate.
"This report will have to be very worrying to the Fed," said Dean Baker, economist with the Center for Economic and Policy Research.
The central bank's policy-setting committee has been gradually raising interest rates in quarter-point increments in an effort to keep inflation from gaining ground and has drawn criticism both from those who think it is acting too slowly to control price escalation and from those who fear that its interest rate increases will stifle an already slowing economy.
The Fed's policy-setting committee meets Tuesday. At this point, most economists expect that it will enact another quarter-point rate increase, but it could change the carefully worded statement that accompanies its actions to indicate whether it regards inflation as a greater threat.
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