WASHINGTON, April 25 - The U.S. economy hobbled along at a weaker-than-expected pace in the first quarter as the war in Iraq and severe winter weather took a toll on spending and investment, a government report showed on Friday. U.S. gross domestic product, the broadest measure of the economy's health, grew by an anemic 1.6 percent in the first three months of the year, the Commerce Department said. That was a bit faster than the 1.4 percent growth rate recorded in the fourth quarter of last year, but it fell well short of the revival in growth some economists had been hoping to see in this report. Bond prices jumped after the report while the dollar pared its gains and stock futures prices slipped. "It was a lackluster, disappointing number, below expectations," said Alan Ackerman, strategist at Fahnestock and Co. in New York. "The economy of late has given us mixed signals, and this number will take some steam out of recent optimism (in the stock market)."
U.S. economists in a survey had expected a 2.3 percent rise in GDP. Consumers, who were nervous in the run-up to the March 20 start of the war against Iraq, spent cautiously. Their spending increased a mere 1.4 percent in the first quarter, the weakest gain since the second quarter of 2001 - in the middle of the 2001 recession. Spending decelerated from a 1.7 percent growth rate in the fourth quarter of 2002. A pullback in car sales accounted for much of the weakness. Also, anecdotal reports have suggested that harsh winter weather kept consumers from the shopping malls in some parts of the country during February and early March. Net exports -- the gap between what Americans consumed from abroad and what they exported -- made a contribution to GDP.
Business investment in new plants and equipment proved to be surprisingly weak, contracting by 4.2 percent in the first quarter following a 2.3 percent rise in the fourth quarter. Spending on equipment and software fell by 4.4 percent, the steepest drop since the third quarter of 2001. One surprise in the report was a 1.5 percent decline in defense spending that came even as the Pentagon was sending thousands of troops and loads of equipment to the Middle East to gear up for the war. Commerce said it could not isolate the exact impact of war spending within the GDP accounts. However, it did point out that weaponry used in the war would have been counted as defense spending only at the time of production and delivery, not when used. Weapons drawn from existing inventories would not necessarily add to spending. It was the first quarterly decline in defense spending since that component fell 6.1 percent in the third quarter of 2000. Underlying inflation in the U.S. economy was extremely muted. The closely watched inflation gauge, the PCE price index, rose 2.8 percent in the first quarter. But stripping out volatile food and energy costs, it inched up only 0.9 percent.//