Economy grows by only 0.6 percent in 1st qtr
WASHINGTON (AP) - April 30, 2008 The country's economic growth during January through March was
the same as in the final three months of last year, the Commerce
Department reported Wednesday. The statistic did not meet what
economists consider a definition of a recession, which is a
contraction of the economy. This means that although the economy is
stuck in a rut, it is still managing to grow, even if slightly.
Many analysts were predicting that the gross domestic product
(GDP) would weaken a bit more - to a pace of just 0.5 percent - in
the first quarter. Earlier this year, some thought the economy
would actually lurch into reverse during the opening quarter. Now,
they say they believe that will likely happen during the current
April-to-June period.
"The economy is weak but not collapsing," said Lynn Reaser,
chief economist at Bank of America's Investment Strategies Group.
"A recession can't be ruled out, although the stars are not lined
up at this point to definitively say one way or the other."
On Wall Street, investors found comfort that the GDP figure was
a bit better than expected. The Dow Jones industrials were up more
than 100 points in morning trading.
Gross domestic product measures the value of all goods and
services produced within the United States and is the best measure
of the country's economic health. Voters are keenly worried about
the country's economic problems and so are politicians - in
Congress, in the White House and on the campaign trail.
White House press secretary Dana Perino said the administration
was disappointed in the figures. "This is nothing to crow about,"
she said. "It is very slow growth, but it is growth nonetheless."
The housing situation turned more bleak in the first quarter, as
record-high foreclosures dumped more unsold homes on the market,
adding to builders' headaches. Builders slashed spending on housing
projects by a whopping 26.7 percent, on an annualized basis, the
most in 27 years. That was the biggest drag on the economy.
Consumers - whose spending is vital to the country's economic
health - turned much more cautious, also restraining overall
economic growth in the first quarter. Their spending rose at just a
1 percent pace. That was down from a 2.3 percent growth rate and
was the slowest since the second quarter of 2001, when the United
States was suffering through its last recession. Shoppers did cut
spending on such things as cars, furniture, household appliances,
food and clothes.
Soaring energy and food prices are walloping people's
pocketbooks, leaving them with less to spend on other things. The
credit crunch also has made it harder for people to finance big
ticket items, such as cars and homes. And, many homeowners -
watching their homes - often their single-biggest asset - slump in
value, also are feeling less wealthy and less inclined to spend.
Another report from the Labor Department Wednesday showed that
workers' compensation - including wages and benefits - grew 0.7
percent in the first quarter, the slowest pace in two years. Many
economists were expecting a 0.8 percent rise. The report suggests
that the weak labor market is making employers a bit less generous
with their compensation.
Businesses, meanwhile, cut back spending on equipment and
software at a 0.7 percent pace, the most since the final quarter of
2006. And, they trimmed spending on commercial construction at a
6.2 percent pace, the most since the third quarter of 2005.
However, growth in businesses' inventories of supplies was a big
force adding to GDP. That could reflect both stronger foreign
demand for U.S merchandise and weaker domestic sales, analysts
said. Exports of U.S. goods and services, which increased at a 5.5
percent pace, also helped first-quarter growth. U.S. exports are
being helped by the falling value of the U.S. dollar, which makes
U.S. made goods and services less expensive to foreign buyers.
Spending by the government was another factor helping out GDP in
the first quarter. That spending rose at a 2 percent pace for the
second quarter in a row.
To bolster the economy, the Federal Reserve is expected to lower
a key interest rate by one-quarter percentage point to 2 percent
later Wednesday. That would mark a more moderate-sized rate
reduction after a recent string of hefty cuts. Many economists
believe the Fed, which started dropping rates last September, may
be nearing the end of its rate-cutting campaign because
policymakers don't want to aggravate inflation. Those rate
reductions, which take months to affect economic activity, can sow
the seeds of inflation down the road.
An inflation measure linked to the GDP report showed that prices
grew at a rate of 3.5 percent in the first quarter, down from a 3.9
percent pace in the prior quarter.
Another gauge showed that the core prices excluding food and
energy rose at a rate of 2.2 percent in the first quarter. That was
a lower than the 2.5 percent pace registered in the fourth quarter
but still outside the Fed's comfort zone. The upper level of the
Fed's inflation tolerance is 2 percent.
Gas and food prices, however, have moved higher since the start
of the year, adding to inflation pressures. Gasoline prices, which
have recently set new record highs, have climbed to $4 a gallon in
some parts of the country.
A growing number of economists believe the economy is in a
recession and is indeed contracting now.
Under one rough rule, if the economy contracts for six straight
months it is considered to be in a recession. That didn't happen in
the last recession - in 2001- though. A panel of experts at the
National Bureau of Economic Research that determines when U.S.
recessions begin and end uses a broader definition, taking into
account income, employment and other barometers. That finding is
usually made well after the fact.
During the first three months of this year, job losses neared
the staggering quarter-million mark. The unemployment rate has
climbed to 5.1 percent and is expected to move higher in the coming
months.
Fed Chairman Ben Bernanke, earlier this month, acknowledged for
the first time that a recession this year was possible.
President Bush on Tuesday said the country was dealing with
"difficult times." Bush said he understood Americans' anxiety
over soaring gas prices, record-high home foreclosures and other
economic woes.
The government's $168 billion economic-stimulus package -
including tax rebates that started flowing to bank accounts on
Monday - should help energize the economy in the second half of
this year, the Bush administration and Federal Reserve officials
say. Democrats in Congress insist more relief needs to be provided,
including additional unemployment benefits to cushion the pain of
joblessness. The administration has resisted, saying the rebates
and other stimulative efforts should be sufficient once they fully
kick in.