WASHINGTON -- — The U.S. economy dodged outright contraction during the first three months of the year, growing at a 0.6% annual pace for a second quarter in a row, the government said Wednesday.
The economy's performance, though positive, was so weak that it helped persuade the Federal Reserve to cut its key interest rate another quarter-point -- to 2% -- and warn that further trouble could be on the way.
"Economic activity remains weak. Household and business spending has been subdued and labor markets have softened. . . . Financial markets remain under considerable stress," the central bank said in its statement explaining the rate decision.
It was the seventh time in as many months that the Fed had sliced its federal funds rate, the interest that banks charge one another for short-term loans. The action brought the total cutback to 3 1/4 percentage points, and the central bank indicated it might put off further cuts for the time being.
Lowering the funds rate is intended to spur growth by reducing the cost of borrowing, including credit cards and business loans. Recent financial turmoil short-circuited the effect of previous cuts, pushing the Fed to cut further and find new ways to buoy the economy.
As for the government's latest snapshot of economic conditions, it suggested that much of the growth from January through March was the result of a mistake -- an unintended buildup of unsold goods by businesses. Virtually every other element of the economy, including consumer spending, business investment and once-hot exports, showed new signs of weakness.
"There's no strength in these numbers," said John E. Silvia, chief economist with Wachovia Corp., the Charlotte, N.C., banking giant. "When you see business inventories rising and sales falling, that's bad news. It can't be sustained."
The fact that the nation's gross domestic product, the broadest gauge of its output of goods and services, has continued on a path of meager growth delays, for the time being, any official declaration of recession.
Robert E. Hall, the Stanford economist who heads the committee charged with determining the economy's peaks and valleys, said that although the panel didn't defer to the traditional definition of a recession as two consecutive quarters of GDP contraction, its decisions were still influenced by that trend. That makes it unlikely the panel will confirm a recession until there's been at least one quarter of contraction.
