US economic growth is downgraded

The US economy was not as hot as previously thought

The US economy grew much slower than originally thought in the first quarter of 2004, a government report has shown.

US GDP growth for the period from 1 January to 31 March has now been downgraded by the Commerce Department from an original 4.4% to 3.9%.

This is below the 4.1% reported for the last quarter of 2004, and comes as a surprise for analysts who had expected the figure to remain at 4.4%.

The Commerce Department at the same time revised up its inflation figures.

Rates to rise?

It now says the core price index for consumer spending - a central inflation measurement that cuts out volatile food and energy prices - rose by 2% in the quarter, up from 1.7% a month ago.

This is likely to further fuel already strong speculation that the Federal Reserve could start to raise interest rates from as early as next week in order to dampen inflationary pressures. The core rate has been at a 46-year, 1% low for the past 12 months.

It's certainly lower than expectations so in that sense it was a disappointment, but the key thing is that this is still appreciably better as a growth rate than the long-term average, which is only about 3% Patrick Fearton, AG Edwards economist

The downward revision in the economic growth figures was blamed on higher than previously estimated imports, and a reduction in the amount US consumers spent on bank services during the period.

Both the fall in economic growth and the increase in the inflation figure will come as bad news for a President George W Bush facing a re-election battle in the autumn.

The 3.9% January to March growth rate is the slowest pace since the second quarter of 2003.

Some economists believe that it could be even lower for the current second quarter - April to June - because of the recent high oil and petrol prices hitting both consumer and business spending.

Still growing

Second quarter economic growth estimates now range from 3.5% to just above 4.5%.

However, it is important to stress that although the latest 3.9% level is lower than expected, it does mean the US economy is continuing to grow - only slower than had been previously thought.

Patrick Fearton, an economist at AG Edwards in St Louis, said it was vital to maintain this perspective.

"It's certainly lower than expectations so in that sense it was a disappointment, but the key thing is that this is still appreciably better as a growth rate than the long-term average, which is only about 3%," he said.

"We've now had three straight quarters of above-average growth, and that's nothing to sneeze at."

Buying rush

While the US economy as a whole may not be growing as fast as previously thought, one sector is definitely booming - housing.

Housing sales in May were up 15.8% on a year earlier, as people scramble to buy before interest rates go up.

"Fundamentals are still very favourable for a vibrant (housing) market," said association chief economist David Lereah.

"In part, the record results from a natural 'fence-jumping' by buyers getting into the market after mortgage interest rates began to rise at a sharper clip in April."