View Full Version : Stagflation

04-28-2005, 09:10 AM

Slowest GDP growth in 2 years

Annual 3.1% rate below economists' estimates; price increase pace quickens.
April 28, 2005: 10:37 AM EDT

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NEW YORK (CNN/Money) - The nation's economy grew at the slowest pace in two years during the first quarter, according to a government report Thursday that was weaker than Wall Street forecasts.

The Commerce Department's initial reading on the first quarter gross domestic product, the broadest measure of the nation's economic activity, showed an annual pace of growth of 3.1 percent, down from the 3.8 percent rise in the fourth quarter of 2004.

It was the slowest quarter since the 1.9 percent annual rate reported in the first quarter of 2003.

Economists surveyed by Briefing.com had forecast growth at a 3.5 percent annual pace.

The report also suggested that there was a pickup in prices in the quarter. Prices paid for items excluding food and energy, an inflation measure closely watched by the Federal Reserve, was up 2.2 percent in the report, compared with a 1.7 percent rise in the fourth quarter, marking the steepest climb in that measure since the fourth quarter of 2001.

The two numbers together raised the prospect of slower economic growth coupled with higher prices, a situation known as "stagflation," which is the worst possible scenario for the economy in the view of many investors.

"Stagflation is rearing its ugly head," said University of Maryland Professor Peter Morici. "Slower consumer spending and disappointing business investment are causing slower growth, high unemployment and wages that lag inflation."

If inflation risks were muted, the Fed might be looking at pausing in its current path of hiking interest rates to give the economic growth a lift. But economists say that in order to combat inflation, the Fed will keep hiking rates, further slowing growth.

"It puts the Fed in a position they probably don't want to be in, but they'll have to keep raising rates," said Drew Matus, senior economist at Lehman Brothers.

The Fed is set to meet next week to consider interest rates and is widely expected to raise rates by a quarter percentage point once again.

While the report disappointed Wall Street, the Bush administration tried to put the best face on the number. Commerce Secretary John Snow said a 3.1 percent growth rate, "shows that the foundation of America's economy continues to be sound and strong."

The report also had some troubling figures on inventories and consumer spending, suggesting that there is more slowing in the economy ahead, said Anthony Chan, senior economist for JPMorgan Fleming Asset Management.

Chan said the growth number, while disappointing, was actually not as strong as it first appears, as much of it was due to a buildup in inventories by businesses.

"Firms are going to move to cut back production to get rid of undesired inventories, thereby pushing growth even lower in the next calendar quarter," he said. "Business spending on equipment and software, which represents the type of spending one needs to see to become more bullish about future growth, proved to be quite disappointing by coming in way below expectations."

The nation's rising trade gap also bit into economic growth. While exports added 0.69 percentage point to the GDP, imports reduced the GDP by 2.19 percentage points.

"Despite the fact that we had a lot of consumption, it seems to be driven by consumption of imported goods," said Matus. "That also sets stage for weaker growth going forward."

Stocks opened lower Thursday. Stock futures, which had already been lower ahead of the 8:30 a.m. ET report, fell further on the disappointing reading. Concerns about slowing economic growth have been a major drag on stocks in recent weeks.

Treasury prices were mostly higher, as the prospects of slower economic growth were balanced by concerns of the Fed needing to hike rates faster to combat inflation.