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Economy Grew at 2.6 Percent Annual Rate for First 3 Months

By John M. Berry
The Washington Post

Restrained by bad weather, sagging exports and a big drop in federal government spending, the U.S. economy grew at a 2.6 percent annual rate in the first three months of the year, less than half the exceptionally strong 7 percent pace late last year, the Commerce Department reported Thursday.

Clinton administration officials and most private analysts saw the smaller rise in the inflation-adjusted gross domestic product, along with the moderate inflation figures included in the report, as good news.

"Today's report should calm fears that the economy is growing at an unsustainably rapid rate or that inflation is about to spike upwards," Laura D'Andrea Tyson, chairman of the president's Council of Economic Advisers, told reporters at the White House. "The numbers indicate that the economy remains on track for growth of about 3 percent, the creation of about 2 million new jobs and an inflation rate of about 3 percent for this year."

Overall, administration economists remain unconcerned about inflation and project sustained, moderate economic growth for the next several years.

But investors and traders seemed not to share that assessment, apparently concluding that much of the slowdown in growth was weather-related and economic growth would rebound to 4 percent or 4.5 percent in the current quarter.

Long-term bond prices fell sharply Thursday, sending yields higher. At the close, owners of 30-year U.S. Treasury bonds had lost $17.50 for each $1,000 face value as yields reached 7.26 percent, up 0.16 percentage points. Bond prices and their interest rates move in opposite directions; that is when rates rise, investors demand a higher return on bonds and force prices down.

Stocks followed bonds lower, as the Dow Jones industrial average fell 31.23 points to close at 3668.31.

Lewis Alexander, the Commerce Department's chief economist, said there was no precise estimate of how much bad winter storms in the East and the severe earthquake in Los Angeles in January had reduced U.S. production of goods and services in the first quarter. Some of the losses were made up late in the quarter as consumers flocked to stores and rebuilding efforts in Los Angeles surged.

While a few analysts expect the economy to rebound significantly this quarter, most private forecasters are predicting growth to be at a 3 percent to 3.5 percent rate. If so, that would put growth for the first six months of the year very close to the administration's 3 percent forecast.

Another reason cited for the sell-off in the bond market was investors' interpretation of the inflation news in the GDP report. The GDP price index went up at a 2.9 percent rate compared to 2.3 percent in the previous quarter. However, most of the inflation increase actually was in prices of U.S. goods sold to foreign buyers, not customers at home. The separate price index for domestic purchases rose at a 2.3 percent rate.