Economy lags, but it may be far from spent

Times Staff Writer

The U.S. economy hit the skids in the first quarter, posting its worst growth rate in four years. But the continued spending of consumers and businesspeople like Debbie Warren has many experts predicting better times.

Warren bought six new computers in January for the optometry practice she manages with offices in West Covina and Whittier. Don’t blame her for the slow economy.

Instead, the slumping housing market was cited as a primary culprit in a Commerce Department report Friday showing that the nation’s gross domestic product grew at a surprisingly sluggish 1.3% annual rate in the January-March quarter, the slowest pace since the first quarter of 2003. That contrasts with the 2.5% growth in last year’s fourth quarter and the 3% pace considered to be par for the U.S. economy during expansions.


Spending on housing construction fell at a 17% annual rate in the first quarter, according to the report.

But many economists expect businesses and consumers to offset the drag of the housing market, leading to rebounding growth the rest of this year.

“It is easy to see the glass as half empty, but we have likely seen the worst of things,” said University of Maryland business professor Peter Morici. “Consumer spending and stronger business investment will likely raise growth for the balance of the year.”

With some stock market indexes setting all-time highs this week, Wall Street also appears to see better times ahead. Strong gains in stock prices, despite weak economic data, suggest that investors are confident that the economy won’t fall into recession, analysts say.

That view also has been reinforced by better-than-expected quarterly earnings reports from many big U.S. companies, including Microsoft Corp., Caterpillar Inc. and 3M Co.

The stock market on Friday largely took the weak growth report in stride. The Dow Jones industrial average edged up to another record high, adding 15.44 points to 13,120.94.

If investors and analysts are right about the economy reviving, the first-quarter slump could be a part of a “midcycle slowdown” similar to that of the mid-1990s. At that time the economy lost steam after a series of Federal Reserve interest rate hikes, but it avoided recession. The economy and the stock market then rebounded, racking up one of the strongest booms ever in the late 1990s.

Nariman Behravesh, chief economist at research firm Global Insight, predicts that economic growth will accelerate to 2.5% to 3% later this year. Morici looks for growth of 3% in the second half.

But not everyone is so optimistic. Some analysts, pointing to the housing slump and the inflationary pressure of high energy prices, say growth won’t pick up much and could even decline further.

A price indicator favored by the Federal Reserve -- personal consumption expenditures excluding food and energy items -- rose at a 2.2% annual rate in the first quarter, up from 1.8% in the final three months of 2006.

Adding to the bearish case was consumer confidence, which has fallen 10% since the start of the year. It dropped again in April, albeit by less than earlier months, according to a report released Friday. The Reuters and University of Michigan index of consumer sentiment fell to 87.1 in April, just below the 88.4 March level and nearly identical to the 87.4 reported last April.

Thankfully, the optimists said, consumer spending grew 3.8% in the first quarter, and business spending gained 2%.

Debbie Warren’s firm, Golden Optometric, had several reasons to contribute to the business spending boost.

The practice needed new computers to satisfy Medicare’s new demands for electronic billing. It bought one to help relay data from a state-of-the-art digital retina imaging machine. And it needed a couple to run patient education programs on wide-screen television monitors in the waiting rooms.

The computers, along with other high-tech equipment, help upgrade every aspect of the practice, including reducing the need for dilation during examination and improving record keeping, Warren said.

“It’s more efficient,” she said. “When we can bill faster and get paid faster, it makes sense all the way around for the investment. It pays off right away.”

Apparently many consumers and business operators had a similar view. During the first three months of the year, computer sales rose 10.9% worldwide and 3.6% in the U.S., a private tracking service reported last week.

Jake Nonnemaker says computers are selling like hot cakes. The owner of an Agoura Hills-based firm called Axicom Inc. helps small businesses buy computers, then helps them network their machines and maintain their new equipment. He said his business jumped 30% in the first quarter over the same period a year earlier.

Businesses are replacing old equipment as well as meeting their expansion needs, Nonnemaker said. A couple of credit card processing firms bought security software and service from him. A laser surgeon hired him to outfit a new office in Valencia, and architects are buying computer-assisted-design stations to keep up with commercial development projects.

Nonnemaker also is starting to see consumers treat computers as disposable items as prices fall and viruses multiply.

“Spyware has become so intrusive that instead of fixing a computer, they will just go out and buy a new one,” he said.

Josh Freedkin, a computer consultant based in Chatsworth, said the introduction of Microsoft’s Vista operating system was driving businesses and personal users to buy new hardware.

It’s all part of an acceleration of obsolescence, he said. For a long time, businesses traded out computers every five years. Now, Freedkin said, “that’s shortened to three.”

Times staff writers Tom Petruno and Michelle Quinn contributed to this report.