US logs better but still weak growth

WASHINGTON (AP) - May 29, 2008 In fact, a closer look behind the 0.9 percent increase in the gross domestic product during the January-to-March period revealed much caution on the part of consumers who have been clobbered by the housing, credit and financial debacles.

"What emerges is a picture of an economy that's gasping for air," said Bernard Baumohl, managing director of the Economic Outlook Group.

Consumers - major shapers of overall activity and thus the economy's lifeblood - boosted their spending at the slowest pace since the last recession, in 2001. And, their decreased appetite for shopping sprees reduced sales of foreign-made imports here, which helped to narrow the trade deficit.

The new GDP reading, released Thursday by the Commerce Department, was an improvement from the government's initial first-quarter estimate as well as the economy's performance in the final quarter of last year. Both periods were pegged at a 0.6 percent growth rate.

However, economists still consider the 0.9 percent growth rate subpar. More normal growth would be along the lines of a 2.5 percent to 3 percent pace, they said. GDP measures the value of all goods and services produced within the United States and is considered the best barometer of the country's economic health.

"The economy is scraping along close to the bottom but it is still afloat," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group.

That was sufficient to buoy Wall Street. The Dow Jones industrial average gained 52.19 points to close up 12,646.22. The Dow was up nearly 133 points at its high of the session.

The new GDP statistics did not meet what analysts consider one definition of a recession - two straight quarters of a shrinking GDP. But that didn't happen in the last recession, either. And, other barometers - nationwide job losses and shrinking paychecks - still point to a possible downturn, analysts said.

Another report showed more people signing up for jobless benefits last week, a fresh sign of softness in the employment market. The Labor Department said new applications filed for unemployment insurance rose by 4,000 to 372,000.

Fallout from the housing crisis continued to be a big drag on overall economic growth; builders slashed spending on housing projects in the first quarter by 25.5 percent on an annualized basis. That was the most in 27 years.

Consumers are feeling the pressure. They increased spending at just a 1 percent pace in the first quarter, the slowest growth rate in that category since the second quarter of 2001. Consumers are pulling back as high energy and food prices leave them with less money to spend on other things. Falling home values are making many homeowners feel less wealthy and less inclined to spend. And the credit crunch has made it harder to finance big-ticket purchases.

When exports and business inventories are removed and imports are added in, economic activity actually contracted at a 0.1 percent pace in the first quarter, the worst showing in more than 16 years. That figure underscores consumers' reluctance to spend vigorously.

"Consumers are hurting," said Ken Mayland, president of ClearView Economics.

Businesses also showed some caution, cutting spending on equipment and software. However, investment in commercial construction wasn't as weak as the government first estimated, contributing to the upward revision to first-quarter GDP.

One bright spot keeping the economy going in the first quarter was export growth. Exports grew at a 2.8 percent pace, although that was not nearly as much as first estimated and was down from a 6.5 percent growth rate in the prior quarter. The falling value of the U.S. dollar has made U.S. exports less expensive to foreign buyers. With exports rising and imports falling, the trade picture improved.

But some analysts predict that slowdowns elsewhere in the world, such as Europe and Japan, will cool future demand for U.S. exports. That would mean exports could be less of a bracing force in overall U.S. economic activity in coming quarters.

Looking ahead, top forecasters at the National Association for Business Economics predict the economy will slow to a near crawl of a 0.4 percent growth rate during the April-to-June period. Growth should pick up to a 2.2 percent pace in the third quarter, energized by the Fed's powerful series of rate reductions and billions of dollars worth of tax rebates from Uncle Sam.

Moreover, 56 percent of NABE forecasters believe that a recession has already begun or will develop this year. A panel of experts at the National Bureau of Economic Research determines when U.S. recessions begin and end, taking into account a variety of economic barometers. That finding is usually made well after the fact.

The Bush administration and the Federal Reserve are hoping for an economic rebound in the second half of this year. That - along with inflation concerns - is why the Fed has signaled it isn't inclined to lower rates further.

Even if economic activity strengthens later this year, the unemployment rate - now at 5 percent - is expected to climb to 6 percent or higher early next year. Businesses, which have trimmed their work forces to cope with the economic slowdown, will hesitate to bulk up again until they feel certain the economy's recovery will be enduring.

Meanwhile, some economists worry that inflation could get worse, given the surging food and energy prices. Oil prices, which have racked up a string of record highs, are hovering above $126 a barrel. Gasoline prices have marched higher, too, moving closer to $4 a gallon nationwide.

Those high prices are a double-edged sword for the economy. They can put a damper on growth and can spread inflation if they force companies to boost their prices.