- The Washington Times - Friday, April 27, 2007

Economic growth creeped along in the first quarter, posting an 1.3 percent annual rate — the slowest in four years — as the housing slump increased its drag on the rest of the economy, the Commerce Department reported yesterday.

Consumers managed to maintain their composure and keep the economy afloat even as a 17 percent drop in residential investment slashed the growth rate for the fourth straight quarter by one percentage point or more.

Buoyed by solid growth in jobs and income, consumer confidence has held up in the face of falling home sales and prices, though it has shown signs recently of crumbling a bit in response to the housing drop and rising gasoline prices.

“Housing remains a severe weight on growth,” said Augustine Faucher, economist with Moody’s Economy.com. Other sectors of the economy are struggling to offset the drag from housing, with little success last quarter.

The strong contribution from exports — which fueled more than a quarter of economic growth last year — unexpectedly faded in the first three months of the year and subtracted from growth. But Mr. Faucher expects exports to pick up again, thanks to strong growth overseas and a weakening dollar, which makes U.S. products more attractive to foreign buyers.

The news of anemic growth put further pressure on the greenback, sending the dollar to a record low of $1.37 per euro yesterday. But while it helps the United States compete in world markets, the soft dollar makes America’s copious imports from oil to electronic goods more expensive for consumers, fueling inflation and the trade deficit, and cutting into purchasing power.

The Commerce Department report showed a surge in inflation to a 4 percent annual rate despite the persistent weakness of the economy, which has averaged a lackluster 2 percent growth rate for the past year.

One hopeful sign, Mr. Faucher said, was an uptick last quarter in business spending on equipment and software after declining in the fourth quarter. He expects such capital spending to gain strength later this year as corporate profits remain strong and businesses have lots of cash on hand to finance investment.

“The major wild card remains the housing market and its impact on the broader economy,” he said. While Economy.com expects housing to stabilize later this year, “if the problems in housing persist, leading to further concerns over mortgage credit quality, the expansion could unravel,” he said. “Consumer spending growth would slow even more, and investor concerns could lead to a financial market event.”

John E. Silvia, chief economist with Wachovia Securities, said the economy faces many challenges, chief among them the persistence of inflation, which makes it impossible for the Federal Reserve to cut interest rates in an effort to revive growth unless the economy weakens more.

“During the typical midcycle of an economic expansion, slow growth is not unusual,” he said. “But what is unusual this time is the length of this period of below-trend growth” and the intransigence of inflation. Still, he expects the economy to muddle through.

Daniel C. North, chief economist of Euler Hermes ACI, a management services company, said the economy’s troubles may be just beginning. He sees many parallels between the late 1990s’ stock market boom-turned-bust and today’s deflated housing market bubble.

“The stock market bubble, which the Fed burst in 2000, caused significant disruption and sent the economy into contraction for three years. The housing market bubble, which the Fed burst just a few months ago, shows all of the same characteristics, including strong evidence already that an economic contraction is upon us.”

Economic growth has fallen precipitously, and job growth will follow, he said. Mr. North expects consumers to be the last domino to fall, as their home equity dwindles and pulls the rug out from under cash-out refinancings and other equity-financing tools consumers used to increase spending in recent years.

Christian Weller, economist with Center for American Progress, also sees “no silver lining” in yesterday’s growth report, with no sector of the economy exhibiting the momentum needed to keep growth going.

“Consumption expanded at a healthy rate of 3.8 percent in the first quarter, but that was still below the 4.2 percent of last quarter. And the growth was fueled by families spending more money than they were making,” he said.

The personal saving rate remained at minus 1 percent — a level so low most economists believe consumers will have to retrench to build up their cash cushions.

Peter Morici, business professor at the University of Maryland, said growth is only taking a pause and dismissed the “pinstriped pessimism of the dismal scientists.”

“Those folks need to raise their window shades and look outside, because there is much to be optimistic about,” he said. “With housing sales slowing, consumers have more money to devote to improving the homes they own and purchasing automobiles, furniture, clothing, and meals in restaurants.”

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