Data Show Slowdown in U.S. Growth

WASHINGTON —  The U.S. economy grew at its slowest rate in two years during the first quarter, the government reported Thursday, confirming fears that rising energy prices, soaring imports and slowing business investment created an economic soft patch.

The Commerce Department said the nation’s gross domestic product grew at an annual rate of 3.1%, down from 3.8% in the final three months of last year and short of the 3.5% consensus forecast of economists. It was the slowest growth since the first quarter of 2003, when the rate was 1.9%.

The report sent stock prices tumbling. The Dow Jones industrial average lost 128.43 points, or 1.3%, to 10,070.37.

President Bush acknowledged that energy costs were taking a toll on the economy.

“Millions of American families and small businesses are hurting because of higher gasoline prices,” he said at his Thursday night news conference. However, the president was optimistic about future growth, saying that “experts tell me that the forecasts of economic growth in the coming months looks good.”

Economists had mixed views of the seriousness of the slowdown and on whether it would extend into the current quarter.

“The economy hit a pothole in the first quarter,” said Mark Zandi, chief economist with consulting group Economy.com. Although 3.1% is close to the economy’s sustainable growth rate, he said, he had hoped for another year close to last year’s 4.4% rate to take the slack out of the labor market and provide jobs for the millions of Americans who are working less than they want to.

Edward McKelvey, a senior economist with investment house Goldman, Sachs & Co., predicted that consumer spending, which rose at a 3.5% rate in the first quarter despite higher oil prices and falling car sales, would keep the economy growing, as it has throughout the recovery from the 2001 recession.

“I’m not worried about the economy,” McKelvey said.

But for the first quarter, much of what business produced moved to shelves instead of consumers. Build-ups in inventories accounted for 1.2 percentage points, or nearly 40%, of the first quarter’s economic growth, while final sales accounted for 1.9 percentage points.

Expecting production to slow while companies draw down their inventories, Goldman Sachs reduced its forecast of growth in the second quarter to 3% from 4%.

“While output is slowing, inflationary pressures are building,” said Dean Baker, co-director of the Washington-based Center for Economic and Policy Research. The broad measure of inflation that the Commerce Department uses in calculating gross national product rose to 3.3% in the first quarter, its highest level in four years. Even without the volatile energy and food sectors, inflation was 3.2%.

Economists said the specter of inflation would keep the Federal Reserve on course to raise its benchmark short-term interest rate by 0.25 percentage point to 3% on Tuesday at the meeting of its policymaking committee.

It would be the Fed’s eighth such increase in its last eight meetings, dating to June 2004. Zandi of Economy.com said the Fed might pause after the next expected rate hike June 29, but McKelvey predicted that the Fed would stay the course for an indefinite period.

Baker said the Fed had no good options. Rising oil and import prices, slowing productivity growth and a falling dollar “will almost surely push inflation higher in the quarters ahead,” he said.

“The Fed will be left with the choice of trying to keep interest rates low to help sustain growth or raising interest rates in an effort to choke off inflation,” Baker said.

Most analysts were surprised that business investment grew at an annual rate of only 4.7% in the first quarter, down from 14.5% in the previous three months. McKelvey of Goldman Sachs said he had thought the fundamentals were in place to support a capital spending gain closer to 10%.

Zandi said tax policy might be the culprit. Until the first of the year, businesses were entitled to a generous tax write-off for the cost of new plants and equipment, and Zandi said many businesses probably moved up to the end of last year investments that they otherwise would have made at the beginning of this year.

But McKelvey said he saw little evidence of a burst of business investment at year’s end.

Steven Wieting, senior economist for Citigroup, said the greatest drag on economic growth in the first three months of the year was the deteriorating U.S. trade position.

Exports grew by 7%, or nearly $20 billion, from the last three months of 2004. But imports shot up by 14.7%, or $61 billion. The difference was enough to subtract 1.5 percentage points from first-quarter economic growth.

Wieting estimated that rising energy prices cut a percentage point from first-quarter growth.

The Commerce Department report included at least two statistical landmarks, one a new high and one nearly a new low.

The U.S. economy produced goods and services at an annual rate exceeding $12 trillion for the first time. But the personal savings rate -- the share of disposable income that Americans save -- fell to 0.6%, the second-lowest level ever, undercut only by the 0.5% registered in the final quarter of 2001.