Soaring Costs of Energy Slow Economic Growth; 'Soft Patch' Expected to Continue

The Washington Times (Washington, DC), April 29, 2005 | Go to article overview

Soaring Costs of Energy Slow Economic Growth; 'Soft Patch' Expected to Continue


Byline: Patrice Hill, THE WASHINGTON TIMES

Record-high energy prices thwarted consumer and business spending in the first quarter, causing growth to fall off to a 3.1 percent pace, the slowest in two years, the Commerce Department reported yesterday.

The oil-induced "soft patch" set in last month when premium crude oil prices soared to more than $58 a barrel in New York trading, and most likely is continuing in the spring quarter, economists say.

Because no one can say how long oil and gasoline prices will stay elevated, it's difficult to predict how long and deep the effects will be on the economy.

Despite a setback in the last week, oil prices remained higher than $50 yesterday, while average gasoline prices remained only pennies below their nationwide record of $2.28 a gallon.

Worries that the slowdown may be long-lasting have plagued Wall Street, where the Dow Jones Industrial Average posted another triple-digit plunge of 128 points yesterday. The Dow is down nearly 800 points from its February high, sinking further with each new report showing a loss of economic momentum.

Some think Wall Street is overreacting.

Although growth is down from last year's robust 4.4 percent pace, it has fallen only to the average rate of expansion since the mid-1980s, noted Richard Yamarone, economist with Argus Research Corp.

"A moderation to 3.1 percent isn't a bad thing," he said, adding that growth continues to be good enough to support the creation of about 155,000 new jobs a month.

Consumers continue to be buoyed by rapid growth in the value of their homes - with housing giving a "blistering" performance of 5.7 percent growth in the otherwise "milquetoast" quarter, he said.

The "wealth effect" from rising home values has bolstered confidence and enabled consumers to finance spending on other items. Thus, spending growth slipped mildly to 3.5 percent from 4.2 percent in the fourth quarter in 2003.

The report showed that businesses were hit harder by the jump in costs for energy and other raw materials - and may have been caught unawares. Business spending on computers and other investments dropped sharply to 4.7 percent from 14.5 percent, while unsold inventories soared by $80 billion - the most since 2000. …

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