As food and gasoline prices soared and tamed consumer spending, a sharp slowdown occurred for economic growth causing the fastest inflation seen in 2½ years. Unemployment benefit claims also rose last week which may negatively affect next quarter’s production. GDP growth slowed to a 1.8% yearly rate from 4th quarter’s 3.1% pace against economists’ 2% expectation.
Partly blamed for the slowdown was defense spending cuts and the cruel weather, analysts remain optimistic though that the economy will again pick up in the 2nd quarter. The defense spending cut is expected to be short-term. Data, especially consumer, software and equipment business spending, was reportedly not as weak as feared which made economists hopeful that stronger growth will take place. The U.S. economic movement is 70% consumer spending.
Last week’s unemployment rise to 429,000 (25,000 higher) signaled some labor market weakening. Analysts said harsh weather in some U.S. states and the Easter holiday could have caused the imprecise reading. Still, the labor market improvement remains reluctant. Economist Omair Sharif said the underlying downtrend in initial claims that had been in place since late last year have flattened out. It seems a little too early to suggest that the underlying pace of layoffs has picked up, he added. March hiring was robust and it is still expected to be reflected in April data due next week.
The dollar grew weak on a feeble GDP report and after the Federal Reserve stated during the 2-day meeting that it will remain committed to the ultra-easy monetary policy program. Despite this, Wall Street investors ignored it, pushing stocks higher. The U.S. government debt prices increased and the Fed adjusted its 2011 growth estimate from 3.4-3.9% to 3.1-3.3%. Some economists viewed the central bank’s forecast as too hopeful given the slow start for 2011. Still, some believe growth would soon pick up partly because of housing’s report of formerly owned homes’ pending sales. March housing reported a 5.1% increase and though housing remains on a struggle to stay on the recovery track, it is one of the economy’s headwinds.
Q1’s growth was impacted by consumer spending cuts at a 2.7% rate from 4th quarter’s 4% increase. Higher commodity prices rendered consumers less spending for other goods. Gasoline prices added to the burden but may soon stabilize fairly. The GDP report emphasized the impact of food and gasoline prices on households. The data’s inflation report reflected a 3.8% rise after 4th quarter’s 1.7% rise. Core price gauge minus food and energy costs hiked at a rate of 1.5% from 0.4% during the 4th quarter. Fed officials prefer a 2% rise.
Business replenishment increased during the 1st quarter bringing inventories to $43.8 billion from 4th quarter’s 16.2 billion rise. Economists however expected more and are looking forward to further inventory rise in the 2nd quarter. 1st quarter inventory GDP grew by 0.93%. Without inventories, the economy gained 0.8% from 4th quarter’s rapid 6.7% rate. Equipment and software business spending was also cheerful but government spending had its most reduction since the 4th quarter of 1983. There was no movement in home construction as nonresidential structures investment rapidly plunged most likely because of the harsh weather.