Economic growth stalls in first quarter

updated 9:01 a.m. ET May 31, 2007

WASHINGTON - The economy nearly stalled in the first quarter with growth slowing to a pace of just 0.6 percent. That was the worst three-month showing in over four years.

The new reading on the gross domestic product, released by the Commerce Department Thursday, showed that economic growth in the January-through-March quarter was much weaker. Government statisticians slashed by more than half their first estimate of a 1.3 percent growth rate for the quarter.

The main culprits for the downgrade: the bloated trade deficit and businesses cutting investment in supplies of the goods they hold in inventories.

For nearly a year, the economy has been enduring a stretch of subpar economic growth due mostly to a sharp housing slump. That in turn has made some businesses act more cautiously in their spending and investing.

The economy’s 0.6 percent growth rate in the opening quarter of this year marked a big loss of momentum from the 2.5 percent pace logged in the final quarter of last year.

Federal Reserve Chairman Ben Bernanke doesn’t believe the economy will slide into recession this year, nor do Bush administration officials. But ex-Fed chief Alan Greenspan has put the odds at one in three.

The first-quarter’s performance was the weakest since the final quarter of 2002, when the economy was recovering from a recession. At that time, GDP eked out a 0.2 percent growth rate. Economists were predicting the first-quarter performance this year would be downgraded, but not as much as it did. They were calling for a 0.8 percent growth rate pace.

GDP measures the value of all goods and services produced in the United States. It is considered the best measure of the country’s economic fitness.

In more encouraging economic news, the Labor Department reported that fewer people signed up for unemployment benefits last week. New filings dropped by 4,000 to 310,000. That suggests the employment climate is weathering well the economy’s sluggish spell.

Many economists believe the first quarter will be the low point for this year. They expect growth will improve but still be sluggish.

The National Association for Business Economics predicts the economy will expand at a 2.3 percent pace in the April-to-June quarter.

In the first quarter, there was a larger trade deficit than first thought. That ended up shaving a full percentage point from the GDP. Businesses cut back on inventory investment as they tried to make sure unsold stocks of goods didn’t get out of whack with customer demand. That lopped off nearly a percentage point to first quarter GDP.

Those were the biggest factors behind the government slicing its initial GDP estimate released a month ago by as much as it did.

MORE FROM STOCKS & ECONOMY

Stocks & economy Section Front

Earnings reports should give clues on economy Price of gas down 10 cents in the last two weeks Consumers' mood sours in early July Stocks post 4th straight week of losses Trade gap narrows to 9-year low in May Nation’s retailers report weak June sales Weekly jobless claims drop unexpectedly Obama: Nations must fight global warming Oil slips below $60 as traders eye earnings Consumers trim borrowing again in May Stocks & economy Section Front   Add Stocks & economy headlines to your news reader: