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Energy price hikes slowing economy, GDP shows

WASHINGTON—Rising oil and gasoline prices dampened consumer and business spending in the first quarter of this year, slowing the U.S. economy and kindling fears of a looming economic slowdown, or worse.

The Commerce Department reported Thursday that the nation's gross domestic product, the broadest measure of U.S. goods and services produced, rose at a 3.1 percent annual rate in the January-March quarter. That's the slowest quarterly growth in two years.

Wall Street shuddered. The Dow Jones industrial index plunged 128.43 points, or 1.3 percent, to close at 10,070.37. Nasdaq's tech-heavy index sank 26.35 points to 1,904.08, off 1.4 percent, and the broad S&P 500 index dropped 13.16 points, or 1.1 percent, to close at 1,143.22.

In addition to the slower growth, perhaps equally worrisome was a GDP core-inflation index that showed first-quarter prices surging by a 2.2 percent annual rate, up sharply from the 1.7 percent rate of the previous quarter and the fastest pace in more than three years.

The combination of a slowing economy and rising inflation raises fear of a return to `70s-style stagflation, when rising prices and interest rates kept growth sputtering at best and led to persistently high unemployment and weak income growth.

"Stagflation is rearing its ugly head," warned Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business.

Unemployment today is only 5.2 percent, not high by historical standards. But some economists, such as Princeton University's Paul Krugman, believe that current weak job creation and low wage growth reflect mild stagflation.

Not everyone agrees.

"We still consider that (stagflation) outcome to be an extremely remote possibility," said Mark Vitner, a senior economist for Wachovia, the big Charlotte, N.C.-based bank, in a written analysis of the GDP numbers. He said slowing economic growth should lower commodity prices, including oil, which would moderate inflation, and that further interest-rate hikes should do the same.

Federal Reserve Board Chairman Alan Greenspan also dismissed fears of stagflation in recent Senate testimony. "It certainly doesn't seem that way," he said.

Most analysts blame high oil prices for the GDP report's trends.

"It was disappointing. I think it reflects the very high energy prices, which are hard for consumers and businesses to digest," said Mark Zandi, chief economist of Economy.com, a consulting firm. "As long as oil prices stay above $50 a barrel, the economy is going to muddle along."

Oil cost more than $50 a barrel throughout the January-March quarter. That spread inflation across the economy as producers passed oil-related price increases to consumers.

Continuing high oil and gasoline prices make it likely that second-quarter growth will be even weaker. One important indicator: Business inventories, the supplies that companies keep on warehouse shelves instead of selling, increased by $80.2 billion in the first quarter, almost double the prior quarter's level. Such a buildup reflects a slowdown in consumer demand and a need to retrench production of more goods until existing supplies are sold off.

Thursday's numbers added to a recent string of weak data reports—on orders for big-ticket manufactured goods, retail sales and industrial production—signaling that the economy is slowing.

Business investment grew by only 4.5 percent in the quarter, the GDP data showed, well below the 14.5 percent growth in fourth-quarter 2004.

Consumer spending also slowed in the first quarter, growing at only a 3.5 percent annual rate, down from 4.2 percent for the previous three months.

"This report will have to be very worrying to the Fed," said Dean Baker, an analyst at the Center for Economic and Policy Research, a think tank in Washington.

The housing sector was one of the few bright spots in the first-quarter numbers. Investment in residential housing grew 5.7 percent, up from 3.4 percent the previous quarter.

The GDP report makes it all but certain that the Federal Reserve will continue raising short-term interest rates to quell incipient inflation. Fed policy-makers are expected to raise its bellwether short-term rate another quarter-point when they meet Tuesday.

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(c) 2005, Knight Ridder/Tribune Information Services.

GRAPHIC (from KRT Graphics, 202-383-6064): GDP

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