- The Washington Times - Saturday, April 26, 2003

The U.S. economy kept growing at a sluggish 1.6 percent pace in the first quarter, despite the slowest consumer spending in a decade, record-high gasoline prices, severe winter weather and a war in Iraq.

With oil prices down sharply, the war now all but over and spring in full bloom, analysts hope the tepid start of the year will be the low point in an economic rebound. The growth figures showed that the economy has not tipped back into recession, as some feared.

"This dip is largely a reflection of the run-up to the war," said Alfred Broaddus, president of the Federal Reserve Bank of Richmond, speaking to a West Virginia Rotary Club. He said he is "optimistic," but not "giddy," about the prospects for the economy.

The first-quarter growth rate reported by the Commerce Department yesterday was slightly above the 1.4 percent rate posted in the final quarter of 2002, and down sharply from the 4 percent rate of last summer.

"This recovery is solid enough to take the hits it's taken and to accelerate moderately throughout this year," Mr. Broaddus said. "I'm hopeful the end of the war, and the removal of at least that uncertainty, will help the recovery gain some momentum."

Mr. Broaddus said he was disappointed by a 4.4 percent drop in business spending on equipment and software during the quarter the first such drop in a year. But he said investment should rebound soon, spurred by the big productivity gains businesses have enjoyed from their computer investments.

Disappointment over the setbacks seen in the report touched off a decline in stocks yesterday, with the Dow Jones Industrial Average falling 134 points to 8,306.

The report also revealed a drop-off in consumer-spending growth to a 1.4 percent rate from 1.7 percent in the fourth quarter a rare, anemic performance that is usually seen during recessions. Spending on air travel, lodging, cars and recreation led the decline.

Economists hope that a solid rebound in consumer sentiment since the end of the fighting, as seen in a measure published by the University of Michigan yesterday, will spark a revival of consumer spending this spring.

Growth in government spending, which has been propping up the economy in recent quarters, fell off to 0.9 percent because of a surprise 1.5 percent decline in defense spending and budget cuts in domestic programs at all levels of government.

The first decline in defense spending in nearly three years came even as the Pentagon was sending thousands of troops and loads of equipment to the Persian Gulf for the war.

The Commerce Department said the Pentagon likely was drawing down existing inventories of weapons rather than ordering new ones during the quarter. Defense spending on weapons is counted at the time of production and delivery, not when the weapons are used.

The most robust source of growth during the quarter was a 12 percent leap in spending on homes, reflecting the strong housing market stoked by 30-year mortgage rates averaging under 6 percent.

Sales of new homes jumped 7.3 percent during March to an annual rate of 1.01 million, the department said, while existing-home sales posted a second month of decline but remained at high levels.

"As long as mortgage rates remain low, housing should do well," said Deborah Johnson, economist at Prudential Securities. She said a bounce-back in mortgage financing activity this month suggests that April home sales will be even stronger than March.

But the fate of the economy continues to rest on consumers, who generate two-thirds of economic activity. There, the prognosis is more mixed, she said.

The 8.4-point jump in the Michigan consumer-sentiment index reported yesterday was the third-largest recorded and reflected the evaporation almost overnight of worries about high gasoline prices as well as success in the war. Yet it was only half the size of the gain following the 1991 victory in Kuwait.

The confidence surge came even as increasing layoffs sent millions of workers to the unemployment lines. Consumers are increasingly concerned about the "jobless" recovery and are aware that economic growth is not strong enough to generate new jobs, Ms. Johnson said.

Wages and consumer incomes are growing enough to support growth in spending, but worries about jobs may make consumers wary for some time to come.

"Consumers turned cautious before the war, but the real question is, what will they do now that it is over?" said Joel Naroff of Naroff Economic Advisers.

If the drop-off in consumer spending during the winter was primarily the result of worries about the war, then it's "on with the recovery," he said. But if it reflected more fundamental fears about jobs, "we could be in trouble."

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