U.S. economic growth slumped in the first quarter as high fuel and food prices drained money from consumers’ pockets and a moribund housing market continued to weigh heavily on job prospects for the unemployed.
The economic growth rate fell to an adjusted annual rate of 1.8 percent in the first quarter, according to the first estimates from the Commerce Department released Thursday morning. Federal Reserve Board chairman Ben Bernanke called attention to the slowing economy in his first press conference yesterday, but called the factors contributing the slowdown “transitory.” The economy grew at a 3.1 percent clip in the fourth quarter.
The Fed blamed poor weather, a short-term drop in military spending and a falloff in exports for the decline, and suggested the economy should return to “sustainable” growth of 3 percent or more for the remainder of the year.
But those words will be of little consolation to jobless Americans, whose ranks began swelling again last week, according to first-time unemployment insurance claims from jobless workers. The Labor Department reported 429,000 Americans filed initial jobless claims in the week ended April 23, up 25,000 from the prior week. Economists had been expecting jobless claims to fall.
Bernanke at his press conference said that he expected the job market to improve slowly over the course of this year, although “we’re digging ourselves out of a very, very deep hole.” There were 7.26 million fewer jobs last month than existed at the January 2008 peak, and labor force participation is at its lowest rate since the early 1980s as millions of Americans have simply given up trying to find work.
Gasoline prices above $4 a gallon in most parts of the country are not only draining consumers’ pockets, but sapping their confidence. Though unemployment fell slightly during the quarter, overall spending rose at just a 2.7 percent annual clip, down from a 4 percent rate in the fourth quarter of last year.
The Fed is now worried that continued higher fuel prices may begin to filter through the rest of the economy, even though for the time being core inflation – the rate of prices increases for items other than food and fuel – remains below 1 percent. The Fed has all but ruled out further monetary policy stimulus, such as buying additional Treasury securities to pump money into the economy. The Fed’s overnight rate for lending between banks, which is its other policy tool, is already near zero and cannot go lower.
The latest data calls into the question the effectiveness of the stimulus program adopted by Congress and the Obama administration in late December, which cut payroll taxes and allowed businesses to write off 100 percent of investment this year, addition to extending the Bush-era tax cuts. It also raises doubts about the Fed’s pump-priming policy of buying huge quantities of Treasury bonds, since it appears to have little effect beyond raising stock prices and depressing the dollar, which makes imports more expensive.
“In a quarter when the economy began to benefit from additional monetary and fiscal stimulus, we had originally hoped for a lot more,” Paul Ashworth, chief U.S. economist for Capital Economics, told The Fiscal Times. “We now expect GDP growth of only 2.5% for the year as a whole, down from our previous forecast of 3.0%. Furthermore, we still fear that the withdrawal of the current policy stimulus will cause growth to slow to only 2.0% in 2012.”
But most economic forecasters, including the Fed, still believe the effects of these policies will be felt for the rest of the year as exports pick up and consumers react positively to having more money in their paycheck from the payroll tax cut. However, should oil prices continue to rise, the stimulative effects of those policies could be drained away by oil producing companies and nations.
Exxon Mobil Corp. reported its first-quarter earnings surged 69 percent as higher oil prices and wider margins on its refining business filtered through to its bottom line. The world’s largest publicly traded oil company declared quarterly profits of $10.7 billion, up from $6.3 billion a year ago. Sales rose 26 percent to $114 billion.
Michelle Hirsch of the Fiscal Times contributed to this report.