April 29, 2005--The economy slowed in the first quarter of 2005 as higher energy prices sapped consumer spending and a surge of imports marginalized domestic manufacturers.

The Gross Domestic Product (GDP), which measures all goods and services produced in the country, grew 3.1% between January and February, reported the Bureau of Economic Analysis (BEA) on Thursday. The first quarter results, which are subject to revisions, marks a slowdown from last quarter, when the economy expanded 3.8%, and is the lowest level in two years.

Consumer spending grew 3.5% in the quarter, as opposed to 4.2% in the fourth quarter of 2004. The slowdown is a result of higher energy prices, said Mark Zandi, chief economist at Economy.com.

"Higher energy prices are hard to digest both for consumers and businesses," he said. "If you have to pay more at the pump, you have less to spend elsewhere."

Prices at the pump increased as much as 4.8% over the quarter and are up over 18% from a year ago, according to the Department of Energy.

Companies hit with higher energy prices passed along the costs to consumers. According to the BEA's report, consumer prices rose 3.0% in the quarter, slightly more than last quarter's 2.9%.

Companies also scaled back on investments in the quarter, particularly in equipment and software, which grew 6.9%, a significant slowdown from last quarter's 18.4% growth rate.

Jay Bryson, an economist at Wachovia Corp., attributed the slowdown to three quarters of double-digit growth in investment in equipment. "I don't want to sugarcoat it, but after the three previous quarters, you should expect some payback," he said.

Exports of American goods grew 7%, partially due to America's weak dollar, but mostly because of a pick-up in the global economy, said Bryson.

Despite healthy exports, imports grew 14.7% in the quarter. In February alone, the United States had a trade deficit of $61 billion, according to the BEA.

The disparity between imports and exports is the main problem with the economy, according to Zandi.

"We are not going to see a change until China changes their currency policy," he said.