In the first of three estimates of first-quarter 2005 GDP that it will publish during the next two months, the U.S. Commerce Department reported on April 28 the U.S. economy grew at an inflation-adjusted annual rate of 3.1% from January through March. That figure is three-tenths of a percentage point below the 3.4% economists generally expected and a full percentage point under the 4.1% rate the most optimistic were forecasting.
The U.S. economy grew at a 3.8% annual rate during the final quarter of 2004. During the first three months of this year, domestic production grew at its slowest rate in two years, with business spending on equipment and software rising by only 6.9%, notes David Huether, chief economist for the National Association of Manufacturers, Washington, D.C.
Chairman Alan Greenspan and the 11 other voting members of the Federal Open Market Committee will be looking at the GDP details, including business investment and U.S. international trade, when they meet on Tuesday, May 3, to decide what to do about interest rates. They'll also be looking at inflation. The GDP price deflator, one of the basic measures of inflation, was at a seasonally adjusted annual rate of 3.2% in the first quarter of this year, the highest it has been since the second quarter of 2004, when it was also 3.2%.
"The Fed can either rein-in inflation by continuing to push up interest rates or accommodate the impact of high gas prices on consumers by backing off interest rate increases," says Peter Morici, a professor the University of Maryland's Smith School of Business in College Park. "If, as expected, the Fed pushes interest rates higher, the impact on inflation will be limited," Morici predicts. "Inflation is largely caused by higher oil prices, as other commodity markets are loosening. Oil prices are determined in global markets, and Fed policy has only a limited impact on demand," he explains. "Higher interest rates will do more to push up [U.S.] unemployment than contain inflation."