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Gas Prices, Bad Weather Slam U.S. Economy; GDP Growth Slowed to 1.8%

The U.S. economy's struggling recovery hit another bump in the road in the first quarter, with brutal winter weather and rising gas prices combining to put the brakes on growth.

According to the U.S. Commerce Department, gross domestic product (GDP) growth slowed to an annual rate of only 1.8%, compared with 3.1% in the last quarter of 2010. The GDP measures all the goods and services produced in the United States.

"The biggest factor was weather. It hurt consumption and construction," Stephen Stanley, chief economist at Pierpont Securities, told Reuters. "Energy hurt consumption as well. Higher gasoline prices took a bigger bite out of people's budget."

The unusually severe series of winter storms affected large segments of the country, delaying major construction projects and disrupting travel and commerce.

Also pulling down the GDP was a big drop in government spending at all levels, but particularly in federal spending, which fell 7.9%. An 11.7% decline in defense spending was the primary culprit.

Trade was another drag on the economy in the January-March period. Imports rose 4.4% after falling 12.6% in the previous quarter as businesses restocked inventories. A growing trade deficit indicates foreign, not domestic, production is meeting U.S. demand, adding to pressure on the GDP.

On the other hand, the rise in inventories, which increased by $43.8 billion, represented much of the GDP's increase. Excluding inventories, the GDP grew only 0.8%.

Another worrisome development in the GDP report is the surge in inflation. The price index for personal consumption expenditures (PCE) – the Federal Reserve's preferred gauge of inflation – rose 1.5% excluding food and energy, up from 0.4% in the fourth quarter. With those items included, the PCE more than doubled from 1.7% to 3.8%.

Gas prices – up about $1.00 a gallon from where they were a year ago – were largely responsible for the jump in the overall PCE. Price increases in other commodities, such as wheat and coffee, contributed to rising food costs.

"Consumers are spending more, but it's getting soaked up in higher gas prices and higher food prices," chief economist at RDQ Economics, John Ryding, told The New York Times. "That's not leaving nearly as much left over for discretionary spending."

Meanwhile, a separate report yesterday (Wednesday) showed weekly jobless claims rising by 25,000 to 429,000, the third consecutive weekly increase. That put the four-week moving average of new claims at 408,500 – the first time it's been over 400,000 since mid-February.

Economists consider the 400,000 level an inflection point; when claims go below that figure, the economy is adding more jobs than it is losing.

Despite the recovery's many nagging issues, U.S Federal Reserve Chairman Ben S. Bernanke has expressed optimism in his historic press conference yesterday that the U.S. economy will do better as 2011 progresses – although not quite as well as the Fed envisioned a few months ago.

"Most of the slowdown in the first quarter is viewed by the committee as being transitory," Bernanke said, speaking for the Fed's Federal Open Market Committee (FOMC). "That being said, we've taken our forecast down just a bit, taking into account factors like weaker construction and possibly just a bit less momentum in the economy."

The Fed cut its growth estimate for 2011 to between 3.1% and 3.3%, down from January's projection of 3.4% to 3.9%.

Of course, not everyone shares Bernanke's confidence.

"Coming in at 1.8, to get to where Fed's forecast is, you're going to need some robust growth in [quarters] two, three and four," Bob Andres, chief investment strategist and economist at Merion Wealth Partners told Reuters. "In my mind, the Fed's forecast and the Street's forecast are more than likely a little too optimistic going forward."

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  1. Francis Bart Bertholic Jr | April 30, 2011

    Same old rhetoric from the Fed; different day

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