US Economic Growth Slows

The IHT reports that the Commerce Department's latest figures show GDP growth slowed to 1.3% in the first quarter. This slow growth is particularly annoying in light of resurgent inflation - which rose at a 4% annual rate. The Fed prefers to consider inflation figures with food and energy costs factored out, so an adjusted 2.2% rate doesn't seem likely to spawn aggressive interest rate moves. Nonetheless, despite their volatility, food and energy prices exact a real cost for the broader economy. Four dollars a gallon for gas seems a remote possibility, but $3 per gallon is much harder on economic activity than $2.25.

The culprit for slower economic growth has been the collapse of residential real estate, which fell by 17% in spite of previous declines of 18.7% and 19.8% the two quarters before. The continuing decline in real estate prices has already made housing more affordable in many of the most expensive markets in the nation, but countless mortgages are going to keep most people's current bills the same.

The weakness in the United States is already being priced into the markets. Worst-case scenarios are being floated that seemed impossible only a year ago. One Bear Stearns analyst has already raised the spectre of stagflation - the horrific combination of sustained slow growth and high inflation.

Still, no new source of a slowdown emerged in the numbers. Analysts have known about weakness in the housing sector for quite some time and energy prices have been significantly higher in the past few years. Exports continued their trend of not following a trend by declining at a 1.2% rate. This compares with an advance of 10.6% the quarter before.

Overall, the numbers suggest that the economy looked a lot like everyone already knew it looked in the broadest outlines and unambiguously weaker than expected from a shorter perspective. These numbers are quite different from last quarter's numbers, so expect a slight upward revision when the next numbers come out. But the general health of the economy is clearly much weaker than many hope for.

Interestingly, corporate profits reported on Wall Street this week don't seem to be closely tracking this slowdown. Maybe Microsoft, Apple, Google, and the others who reported this week are somehow immune, or maybe the revision will be larger than usual next quarter.