Economic Growth Not as Strong as Previously Believed

U.S. government data cast twin clouds on the big-picture view of the economic recovery Friday, saying economic expansion in the first quarter wasn’t as strong as earlier reported, while inflation was actually higher than believed.

The Commerce Department said gross domestic product (GDP) expanded at an annual rate of 3.9 percent during the first three months of the year, down from the 4.4 percent reported last month and down from the 4.1 percent rate of growth recorded in the last quarter of 2003.

The core personal consumption expenditure price index, meanwhile, which measures inflation on the consumer, rose 3.1 percent in the first quarter, up from earlier reports of 3 percent expansion.

News Balanced Out

But the news was at least balanced out, if not completely countered by other data. The closely watched consumer confidence index from the University of Michigan put consumer confidence for June at 95.6, up from 90.2 in May.

Within the report, the forward-looking expectations index was also up, rising to 88.5 in June from 81.6 in May. And sales of existing homes grew more than expected last month, rising 2.6 percent.

At least initially, the good news won out on Wall Street, where markets were higher across the board during the morning, although all indices were trading nearly flat by midday.

Imported Revisions

The Commerce Department said the downward revision in the first-quarter GDP stemmed in part from an increase in imports.

Because the GDP measures activity within the U.S. borders, the fact that U.S. consumers bought more overseas goods dented the growth rate somewhat, as did a downward revision in the cost of services to consumers.

Commerce Department spokesperson Virginia Mannering told the E-Commerce Times that the trend remains positive, with consecutive quarters of growth and increased activity across the economic landscape.

The revision represents a decrease of about $14 billion worth of economic activity. “It’s not enough to take away from the trend,” Mannering said.

Still Looking Up

Economists said the mixed reports should lead to a measured response at next week’s greatly anticipated meeting of the Federal Reserve Open Market Committee.

Economists are now widely expecting the Fed to raise the overnight rates just a quarter-point off their 46-year low of 1 percent, where it has been for a year.

Economy.com chief economist Mark Zandi said the lowered growth rates reflects the competition U.S. companies are feeling from overseas, with foreign companies taking a substantial slice of the new economic activity.

“The numbers say the economy is strong, but the growth isn’t as hot as we thought,” Zandi told the E-Commerce Times.

Zandi also noted that the government’s composite data for corporate profits was also higher in the quarter and that the main drivers of the economy — consumer and government spending and investments by corporations aimed at beefing up inventories — all remained strong.

The cooler-than-thought economic expansion might also help assuage fears of sharp interest rate hikes, he noted.

While $14 billion seems like a lot of economic activity to lose, the revision “does not change the overall picture of an economy that’s growing at a healthy clip,” Zandi added.