WSJ: U.S. Economic Growth Slows

ECONOMY|APRIL 28, 2011, 4:57 P.M. ET
U.S. Economic Growth Slows

By CONOR DOUGHERTY

Economic growth stumbled in the first quarter, but most economists see it as a passing phase caused by a combination of bad weather and surging prices.

Gross domestic product—the tally of all the goods and services produced by the nation—expanded at a 1.8% annual rate in the first three months of the year, the government said Thursday. That is down from 3.1% growth in the fourth quarter of 2010 and the slowest pace of growth in three quarters.

The weak first-quarter performance was a setback to an economy still struggling to shake off the aftermath of the worst recession in a generation. The recovery already had been hobbled by a feeble housing market. But recent months saw a surge in gas and grocery prices—which damped consumer confidence—as well as a wave of cutbacks by state governments struggling to balance their budgets.

Still, most economists say the lull was driven by temporary factors and are forecasting brisker growth in the current quarter and the second half of the year. A first-quarter slip in defense spending, for instance, isn't expected to last. Companies continue to pour money into new equipment and are finally adding jobs at a more rapid clip. Exports grew at a slower pace in the first quarter, but foreign demand remains strong—suggesting that export growth could accelerate during the year.

"If this is a temporary decline then I think the hiring is likely to continue on a sustained basis," said Austan Goolsbee, Chairman of the White House's Council of Economic Advisers.

Republican House Speaker John Boehner said the slowdown in growth was troubling given the improving but still-high unemployment rate. "We are still not seeing the type of economic growth and private-sector job creation needed to help Americans who are struggling across this country," he said in a statement.

Many economists and the Federal Reserve say they expect inflation pressures to ease as the year goes on. The GDP report confirmed that prices surged in the first quarter: The price index for personal consumption expenditures—an inflation measure closely watched by the Fed—rose at a 3.8% annual rate, the fastest pace since the third quarter of 2008.

Excluding the volatile food and energy sectors, which Fed officials believe gives a better sense of longer-run inflation trends, the index rose at a 1.5% annual rate. That is below the Fed's long-run objective of 2%, but the pace has quickened considerably from the roughly 0.5% growth in the second half of 2010. While Fed officials have raised their inflation forecasts for 2011, Fed Chairman Ben Bernanke said in a first-ever news conference Wednesday that he believed much of the recent increase in prices will slow, and therefore doesn't now justify a shift in the Fed's easy-money policies.

Meantime, factors that bode well for economic growth—such as the improving labor market and surveys that show businesses ramping up investment–have generally been strong. That was echoed in Thursday's report, which showed businesses continued to invest in new machines, with spending on equipment and software up 11.6%.

Consumer spending, which accounts for 70% of economic activity, grew 2.7%, adjusted for inflation. That was a significant slowdown from the 4.0% pace in the fourth quarter of 2010, but more than economists had expected given the steep rise in gas prices.

Jobless Claims Jump

"There is very strong evidence that the private sector is showing improvement," said Bruce Kasman, chief economist at J.P. Morgan. And "the household sector held in well despite a pretty big energy shock."

Bookings have improved at moving company Atlas World Group, which CEO Glen Dunkerson interprets as a sign that businesses plan to continue spending and hiring for at least the next few months.

Atlas handles corporate relocations for many of the country's biggest employers, and this year anticipates handing about 80,000 moves, up from 75,000 last year and 71,000 in the 2009, the worst year of the recession. After a brief slowdown early this year, Mr. Dunkerson says, business rebounded and March and April were strong. "What (customers) are telling us is good," he said. "They're hiring, they're planning on moving people."

Atlas plans to do some hiring of its own, including about 25 people at its 400-person headquarters in Evansville, Ind.

Economists' forecasts for brighter months ahead are predicated on businesses continuing to hire and consumers continuing to spend.

Thursday brought worrisome news on the job front: A Labor Department report showed the four-week average of initial claims for unemployment insurance rose by 9,250 to 408,500 in the week ending April 23. That is the first time the average has risen above 400,000 since the week ending Feb. 19.

—Ben Casselman
and Jon Hilsenrath
contributed to this article.
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