Growth picks up, but so does inflation

Final reading on first-quarter economic growth edges up to 0.7% but key price measures also accelerate.

By Chris Isidore, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- The economy grew at a slightly faster pace in the first quarter than previously thought, the government said Thursday, but the reading also included slightly higher inflation pressures.

Gross domestic product, the broadest measure of the nation's economic activity, grew at a 0.7 percent annual rate in the first quarter, the Commerce Department reported.

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That's up from the 0.6 percent rate reported a month ago, but slightly below the 0.8 percent pace forecast by economists surveyed by Briefing.com. As was the case with the previous reading, the pace of growth is the weakest since the fourth quarter of 2002.

The so-called PCE price deflator, a measure of prices paid by consumers, picked up a bit, and grew at a 3.5 percent rate in the quarter, versus the 3.3 percent estimate a month ago.

The even more closely watched core PCE deflator, which strips out volatile food and energy prices, grew at a 2.4 percent rate, up from 2.2 percent.

Policymakers at the Federal Reserve, who conclude their two-day meeting Thursday, are widely believed to want to see the core PCE deflator growing at a 1 to 2 percent rate.

Inflation was a drag on economic growth in the quarter. Another major drag continues to be the battered housing market, which cut about 0.9 percentage points from growth in the quarter, slightly worse than the previous reading.

Still, consumer spending stayed strong, growing at a 4.2 percent rate, down only slightly from the earlier estimate of 4.4 percent and better than the full year increase in any of the three previous years.

The weak first quarter will likely leave the economy with below average growth this year, though most economists forecast a pickup in the current quarter.

"I think the best case scenario is 2.5 percent for full year," said Jeoff Hall, chief U.S. economist for Thomson Financial. "To get that, you'll have to get 3 to 3.5 percent growth in the second half. That's going to be difficult to accomplish."

While full-year economic growth is expected to stay sluggish, most economists are expecting to see second quarter GDP grow at between 3 and 3.5 percent, due to the bounce back from the first quarter weakness.

"However, in the same way that the very weak first quarter numbers understated the strength of the economy, the strong second quarter numbers will exaggerate the amount of momentum," wrote Nariman Behravesh, chief economist for economic research firm Global Insight. "Excluding the volatile inventory and net export components of GDP -- which pushed down Q1 growth and are pushing up Q2 growth -- the underlying rate of growth is now around 2.5 percent."

Aaron Smith, economist for Moody's Economy.com, said much of the growth the rest of the year will depend upon the interest rate environment. He said that when the yield on the 10-year Treasury note recently spiked up to near 5.3 percent, he was concerned that his firm would have to cut economic forecasts for the rest of the year. But since they've retreated closer to 5 percent, the firm has kept forecasts of 2.1 percent growth for the full year.

"My feeling is we're still doing fine on this balancing act," he said. Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.