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Higher food, gas prices to curb US first-quarter GDP
LUCIA MUTIKANI
Published in The Saudi Gazette on 29 - 04 - 2011

WASHINGTON: US economic growth likely braked sharply in the first quarter as higher food and gasoline prices crimped consumer spending, but the setback will probably be fleeting given a firming jobs market.
Harsh winter weather in the first two months of this year and a widening trade gap are also partly blamed for the anticipated weak performance, which caught economists off guard after the economy exited 2010 with strong momentum.
Growth in US gross domestic product — a measure of all goods and services produced within US borders — probably slowed to a 2 percent annual rate or even less, according to a Reuters survey, after a 3.1 percent fourth-quarter pace.
The Commerce Department will release its first estimate of first quarter GDP at 8:30 A.M.
“We hit a bit of a soft patch in the first quarter, but that should prove temporary because weather was a drag and we got blindsided a bit by a jump in gasoline prices late in the quarter,” said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.
The Federal Reserve Wednesday acknowledged the slowdown in first-quarter growth, describing the recovery as proceeding at a “moderate pace” — a slight step back from a statement in March when it said the economy was on a “firmer footing.”
It trimmed its growth estimate for 2011 to between 3.1 and 3.3 percent from a 3.4 to 3.9 percent January projection.
The US central bank signaled it was in no rush to start withdrawing the massive monetary stimulus it has lent the economy. It confirmed plans to complete its $600 billion bond buying program in June.
Growth in the first quarter was likely curtailed by a sharp pull back in consumer spending, which is expected to have expanded at a rate of 2 percent or less after a strong 4 percent gain in the final three months of 2010.
Rising commodity prices meant the households that drive about 70 percent of US economic activity had less money to spend on other items.
“The consumption boom that we saw in the fourth quarter of last year was simply unsustainable,” said Neil Dutta, an economist at Bank of America Merrill Lynch in New York.
“Four percent consumption growth in an environment where real wages are negative and savings were drawn down doesn't really make for a sustainable upturn in consumption.”
Still, economists expect consumer spending to trend higher in the second quarter, mostly on the belief gasoline prices will not rise much above $4 a gallon on average.
Fed Chairman Ben Bernanke told reporters on Wednesday that gasoline prices, which averaged $3.88 a gallon in the week to Monday, were unlikely to continue rising at their recent fast pace and, instead, should stabilize and perhaps even decline.
Ironically, the labor market, which until recently had lagged the economic recovery that got under way in the second half of 2009, is seen underpinning growth in the coming quarters. Exports are also seen shouldering the recovery.
The economy added 216,000 jobs in March, the most in 10 months and the unemployment rate dipped to a two-year low of 8.8 percent from 8.9 percent in February.
“We can see a sustained growth in employment over the next few months,” said Millan Mulraine, senior macro strategist at TD Securities in New York. “One or two months will be lower or higher, but if that continues to be the case, then this recovery will remain on track, perhaps accelerate.”
In the first quarter, growth was seen curbed by a widening trade deficit as a need for businesses to rebuild inventories sucked in imports.
A widening trade deficits weighs on GDP growth because it shows more US demand being sated by overseas production. Nevertheless, strong import growth has been seen as a sign of underlying strength in domestic demand.
Business inventories are expected to account for the bulk of growth in the January


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