US economic growth slows to 1.8%
2011-04-29 11:24:57
Slowing growth and inflation of 3.8%, its highest in two and a half years, are a blow to the Obama administration
US economic growth slowed sharply in the first three months of the year as higher food and petrol prices dampened consumer spending and sent inflation rising at its fastest pace in two and a half years.
Projected annual growth slowed to 1.8%, from the bullish 3.1% recorded in the final quarter of 2010. Figures showing jobless claims unexpectedly rose, adding to the dismal picture.
The average national price of gasoline rose to a $3.799 a gallon this week in the US and prices have risen 25% this year, taking a large chunk out of household income.
Inflation surged to 3.8%, its highest since the third quarter of 2008, after rising only 1.7% in the fourth quarter. The core inflation index, which excludes food and energy costs, was 1.5%, the highest since the fourth quarter of 2009.
The figures are a blow to the Obama administration, which hoped low interest rates and rising exports would maintain the country's strong recovery from the banking crisis.
Barack Obama has come under pressure from rightwing critics of his growth strategy, which they argue has allowed the deficit to balloon and inflation to surge. Treasury secretary Tim Geithner has claimed the recovery will stall if severe cuts are implemented too quickly.
Economists are divided on the path of the economy over the next six months with some arguing the downbeat figures confirm a general slowdown in growth across the developed world as the effects of fiscal stimulus policies wane and austerity measures take their place.
Geithner has maintained much of the federal stimulus put in place during the banking crisis, but has presided over large cuts by individual states, which must balance their budgets.
Only Germany has maintained its robust growth, mainly on the back of exports to Asia. The UK government has estimated annual growth at 1.5% to 2%, with a consensus hovering on or below 1.5%.
A slower pace of growth was signalled by Federal Reserve chairman Ben Bernanke who predicted a sub-2% rate at his first press conference on Wednesday evening, but the commerce department figures were still greeted with dismay by many traders concerned at the outlook for the US economy.
The S&P 500 index of leading shares dipped 3 points before recovering to add 3 points by evening in London, while the Dow Jones and FTSE 100 nudged up 0.2% and 0.03% respectively. Gold and silver climbed to new highs, with gold pushing beyond $1,538 an ounce. The dollar continued its long decline, after Bernanke's remarks were taken to mean interest rates would stay low for a prolonged period.
In another report, new weekly claims for jobless benefits jumped to 429,000 in the week to 23 April, from 404,000 the previous week.
Capital Economics said it agreed with the Fed chief that many of the factors holding back growth were mostly "transitory" and growth should pick up again over the next couple of quarters. "Nonetheless, in a quarter when the economy began to benefit from additional monetary and fiscal stimulus, growth of less than 2% is still disappointing," it said.
Chris Williamson, chief economist at Markit, argued survey data showed the economy was still growing strongly.
"Reassuringly, surveys such as the ISM Purchasing Managers' Index suggest that the economy retains strong momentum, and global PMI data indicate that export markets are showing resilient growth.
"Moreover, Bernanke continues to stress the Fed's belief that inflationary pressures are transitory, which means that monetary policy should remain accommodative and supportive of the recovery in the near-term at least. Finally, the recovery appears to now be generating jobs in meaningful numbers, which should help bolster domestic demand and ensure the recovery becomes self-sustaining," he said.
Richard Bryant, head of treasury trading at MF Global Securities, argued that bond prices were spooked by the jobless figures more than the slight decline in GDP.
He said: "The big surprise was that jobless claims were a little bit higher than people were looking for, a little bit higher than expectations, so the Treasury market is retaining the bid that it has demonstrated since yesterday afternoon. This data certainly supports the bid. GDP had no major surprises, the headline was a little bit weaker than expectations."