First-Quarter Economic Growth Was Slowest Since Late 2002

WASHINGTON, June 28 (Reuters) — The economy grew at a 0.7 percent annual rate in the first three months of this year, the weakest in more than four years, but a closely watched inflation gauge unexpectedly accelerated, data showed on Thursday.

It was the weakest quarterly expansion in the gross domestic product since the fourth quarter of 2002. The slowdown came as businesses sold off inventories even though consumer spending remained strong.

But a leading inflation gauge favored by the Federal Reserve — the personal consumption expenditures price index excluding food and energy prices — showed that price pressures were stronger than expected.

The index was revised up to a 2.4 percent rate from the prior 2.2 percent estimate. Economists expected the core index to remain at 2.2 percent.

The higher inflation is what folks are focusing on. Its a little disconcerting, said Mark Vitner, an economist at Wachovia Securities in Charlotte, N.C.

A separate report from the Labor Department showed stable labor market conditions as the number of workers applying for jobless benefits fell by 13,000 last week, to a seasonally adjusted 313,000.

That level was slightly lower than what Wall Street economists were expecting and was taken as a sign the labor market was still strong. But layoffs linked to auto retooling shutdowns typical in the summer months could skew the labor picture in coming weeks, economists said.

We wont have a clear idea of any change in the trend in claims until the end of July, said Ian C. Shepherdson, the chief United States economist at High Frequency Economics in Valhalla, N.Y.

For now, though, the message seems to be that while companies have clearly cut back the pace of hiring, they are not significantly increasing layoffs, he added.

The G.D.P. report, the final of three estimates, was slightly better than the governments earlier reading of 0.6 percent during the first quarter but weaker than the 0.8 percent growth economists expected. It was down from 2.5 percent in the fourth quarter of 2006.

Businesses cut inventories at a $4.2 billion annual rate during the quarter, the department said, slightly less than the $4.5 billion annual rate in the previous estimate for the quarter but still big enough to pull growth down during the quarter.

Imports increased at a 5.5 percent rate during the quarter, slightly lower than the 5.7 percent estimate a month ago, but still a big enough rise to also help slow the G.D.P. growth rate. At the same time, exports advanced at a 0.7 percent rate, a reversal from the 0.6 percent contraction in the previous estimate.

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