Economic growth is slowing, inflation surges

A woman on a fill at a gas station in Los Angeles, April 11, 2011.

Credit: Reuters/Fred ProuserBy Lucia Mutikani

WASHINGTON | Thu 28 april 2011, 1: 37 pm EDT

WASHINGTON (Reuters)-economic growth braked sharply in the first quarter, as higher prices of food and petrol dampened consumer spending and inflation rising at its fastest pace in 2-1/2 years sent.

Another report on Thursday showed a surprise jump in the number of Americans claimed unemployment benefits last week, which can be a shadow on expectations for a substantial pickup in output in the second quarter.

Growth in gross domestic product slowed to a 1.8% annual growth after a 3.1% fourth quarter pace, the Commerce Department said. Economists had expected a 2 percent pace.

With many of the pull back traced to cuts in defence spending and harsh winter weather sharp, analysts were hopeful that the economy would recover speed in the second quarter. The decline in defence spending was seen as temporary.

"Growth has been disappointing given the dynamics of the economy heading into the year. We are still of the belief that the economy of the soft patch via this quarter in the second half of the year will improve, "said Brian Levitt, an economist at OppenheimerFunds in New York.

Economists were encouraged that details of the report, in particular consumer spending and business spending on software and equipment, were not so weak as they had feared, and said that this proposed a foundation for stronger growth instead.

Consumer spending accounts for about 70 percent of u.s. economic activity.

LABOR MARKET WEAKNESS?

While a 25,000 rise in claims for State jobless benefits to 429,000 last week hinted at a weakening of the labour market, analysts warned against reading too much into it. They said severe weather in some parts of the country and the Easter holidays could have disrupted the figure.

Yet, the data suggested improvements on the labour market were still only reluctantly.

"The underlying downtrend in initial claims that had been in place since late last year has flattened out," Omair Sharif, said an economist at RBS in Stamford, Connecticut. But he added: "it seems a little too early to suggest that the underlying pace of layoffs has picked up."

Hiring accelerated in March and a report is expected next week to show employment has remained relatively robust in April.

MODERATE PACE

Prices for us government debt increased after the data, while stocks edged lower. The weak GDP report and the Federal Reserve declared commitment to a loose monetary policy stance following a two-day meeting on Wednesday the dollar near a three-year low against a basket of currencies.

The Fed on Wednesday trimmed its growth estimate for 2011 between 3.1 and 3.3 percent of a 3.4 3.9% January projection.

Some economists felt that the u.s. Central Bank estimates may be a bit optimistic, given the poor start to the year, although most agreed that growth would strengthen quickly.

Optimism that the economy would find a more solid basis in the second quarter was boosted by a report showing pending sales of previously owned homes rose 5.1 percent in March. Housing is struggling to recover and is one of the headwind for the economy.

Growth in the first quarter was cut short by a sharp pull back in consumer spending, which expanded at a rate of 2.7% after a strong increase of 4 percent in the fourth quarter.

Soaring commodity prices meant consumers had less money to spend on other items. Gasoline prices remain a source of concern, even though they are expected to stabilise somewhat.

RISING INFLATION

GDP report underscores the pain that strong food and gasoline prices are inflicting on households.

An inflation gauge contained in the report at a rate of 3.8 percent--the fastest pace since the third quarter of 2008--rose after an increase of 1.7% in the fourth quarter.

A core price gauge, which excludes food and energy costs, accelerated a 1.5% growth--the fastest since the fourth quarter of 2009--from 0.4% in the fourth quarter. The core gauge is closely followed by Fed officials, who wants to see it closer to 2 percent.

In the first quarter, stocks off by companies picked up, with increasing 43.8 billion dollars after rising 16.2 billion dollars in the fourth quarter. The building, however, was less than economists had expected and some said that they looked for further inventory building to strengthen growth in the second quarter.

Inventories added 0.93 percent points to first quarter GDP growth. With the exception of stocks, the economy grew at a pedestrian pace 0.8% after a solid 6.7 percent growth in the fourth quarter.

Steady business spending on equipment and software, but public expenditure ago its deepest contraction since the fourth quarter of 1983.

Home building no contribution, while investment in nonresidential structures decreased in its fastest pace since the fourth quarter of 2009, probably the result of bad weather.

(Additional reporting by Mark Felsenthal, Arkansas; Editing by Neil Stempleman)

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