Economy's pace slowest in 2 years
Weaker growth blamed on high energy costs as 1st-quarter GDP slumps
By Chris Reidy, Globe Staff | April 29, 2005
The US economy expanded at its slowest pace in two years in the first quarter of 2005 as high energy prices squeezed consumer and business spending.
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During the quarter, the gross domestic product -- the value of goods and services produced in the United States -- grew at an annual rate of 3.1 percent, down from a 3.8 percent rate for 2004's fourth quarter, the US Commerce Department reported yesterday. Many economists had been looking for a first-quarter growth rate of 3.5 percent.
''Clearly, the economy lost momentum in the first quarter," said Nigel Gault, US economist at Global Insight, a Waltham forecasting firm. ''The farther we got into the quarter, the softer it got."
Stocks fell on the news. The Dow Jones industrial average lost 128.43, or 1.3 percent, to close at 10,070.37. The Standard & Poor's 500 index fell 13.16, or 1.1 percent, to 1,143.22. The Nasdaq Composite index retreated 26.25, or 1.4 percent, to 1,904.18, the lowest since Oct. 14.
A string of reports in recent weeks, including reports of a widening trade deficit and a drop in housing starts, suggests an economy growing at a disappointing, though still decent, pace.
And while oil prices have fallen below the high of $57.27 they hit April 1, they still traded yesterday at around $51.77 a barrel on the New York Mercantile Exchange. A year ago, oil was below $40 a barrel.
''If you push up oil prices, something's got to give, and what gave was the GDP," added Nicholas Perna, an economist in Ridgefield, Conn., in a reference to the gross domestic product.
High gas prices mean that consumers and businesses have less money to spend on everything else.
''With gas prices consistently above $2 a gallon, it's hard to believe that consumer spending will continue to be as vibrant as it's been," said Michael Miles, chief operating officer of Staples Inc., the Framingham office-supplies retailer.
Meanwhile, an inflation indicator tied to the GDP report went up -- an indicator closely monitored by officials at the Federal Reserve. Combined with slower growth, a rise in inflation is likely to prompt Fed policy makers to raise the key short-term interest rate from 2.75 percent to 3 percent at their meeting scheduled next week, economists said. Since mid-2004, the Fed has been gradually increasing rates.
Economic expansion was further slowed by the US trade deficit, which subtracted 1.49 percentage points from first-quarter growth