U.S. economic growth was weaker than expected in the first quarter, as consumers were distracted by the prospect of war and companies continued to be stingy in the face of flailing demand.
The Commerce Department said first-quarter gross domestic product, the value of all goods and services produced in the U.S., rose at a 1.6% annual rate in the year's first three months. That's up from the fourth quarter's 1.4%, but short of economists' expectations for growth north of 2%.
"The economy isn't terribly weak, but inflation was higher than expected because of a rise in energy prices in the period, which dampened the adjusted numbers," said Gary Thayer, chief economist at A.G. Edwards & Sons. Thayer predicts economic activity will grow by a 3.2% annualized rate in the fourth quarter.
The GDP report is the first of three that the Commerce Department will issue about the first quarter, and it could be revised before the final number is released.
War with Iraq caused oil prices to hit a 12-year high in March. The GDP price deflator, a gauge of inflation tied to the report, grew at a 2.5% annual rate in the first quarter, from 1.8% the previous period and above the 2% economists had expected.
War fears pushed consumer confidence to its lowest level in nine years during the quarter, which resulted in lower consumption. Now that the war's over, sentiment is ticking higher. The University of Michigan consumer sentiment index rose to 86 in late April from last month's reading of 77.6, according to a separate report released Friday.
"The improvement in sentiment is a positive sign that consumer spending will continue to grow," Thayer said. "This could lead to further strength in the stock market and businesses feeling its all right to invest again."
The economy has grown in fits and starts since the end of the recession in late 2001. In the first quarter, the growth rate was set back in part by delays in business spending decisions because of the war. Government spending was also postponed, which may have shifted some of the growth potential into the second quarter, economists said.
A third report Friday showed that new-home sales rose 7.3% in March to an annualized rate of 1 million units, above the consensus estimate of 905,000 units, partly due to better weather, economists say. But existing-home sales fell 5.3% in March to a rate of 5.53 million units from 5.86 million, below the 5.72 million forecast.