Economy's Growth Slows

The economy lost momentum in the opening quarter of 2005, growing at an annual rate of 3.1 percent. The slowest pace of expansion in two years, amid soaring gasoline prices and rising interest rates, offered new evidence the economy has hit another "soft patch."

The latest reading on gross domestic product, released by the Commerce Department on Thursday, showed that consumers and businesses turned cautious in their spending in the January-to-March quarter, a key factor in the slower economic growth. High energy prices and rising borrowing costs are causing Americans to tighten their belts a bit.

"The problem appears to be the higher energy prices, and if energy prices stay elevated, the economy is going to struggle," Mark Zandi, chief economist of Economy.com told CBS Radio News. "If energy prices moderate, which I think at this point is still the most likely scenario, then the economy should have a reasonably good year."

The first-quarter's GDP figure, down from a 3.8 percent pace logged in the final quarter of 2004, represents the economy's most sluggish showing since the first quarter of 2003, when economic activity expanded at an even more mediocre 1.9 percent rate.

GDP, the broadest barometer of the economy's health, measures the value of all goods and services produced within the United States.

The newest snapshot of the economy is likely to disappoint economists. Before the report's release, they were forecasting a 3.4 percent growth rate for the first quarter.

That estimate marked a downgrade from just a few weeks ago when economists were predicting that business growth would clock in at a pace of 4 percent or better in the first quarter. But they scrambled to lower those forecasts in the wake of a spate of disappointing economic reports in recent weeks.

Those disappointing reports — including retail sales, industrial production and big-ticket orders to factories — along with Thursday's GDP figure, add to evidence that the economy hit a "soft patch." That's the term Federal Reserve Chairman Alan Greenspan used last spring when economic growth slowed abruptly.

Economists also are lowering their estimates for growth in the current April-to-June quarter — to around a 3 percent rate — or possibly less.

For now, economists believe any soft patch will be temporary and don't believe that it would be a harbinger of recession.

"If energy prices moderate, which I think at this point is still the most likely scenario, then the economy should have a reasonably good year," said Zandi.

Although a 3.1 percent growth rate may disappoint economists, it is a decent pace of expansion, nevertheless.

President Bush wants to see the economy on solid ground as he tries to sell Americans his vision of overhauling the Depression-era Social Security program. He is promoting the idea of letting workers set up individual investment accounts in stocks and bonds, using a big chunk of payroll taxes to do that.

The signs of slowing economic growth are especially disconcerting because they raise new questions about the state of the labor market, whose recovery from the 2001 recession has been uneven. Payrolls expanded by just 110,000 in March, the fewest new jobs in eight months.

"Business aren't going to create as many jobs as we thought they were, and as such, the job market is not going to be as strong, and workers are just not going to be able to get those bigger pay increases that they probably had hoped for," said Zandi.

The employment report for April will be released by the government next week.
By Jeannine Aversa