U.S. Economy Expanded at 0.6% in Q1

The U.S. economy expanded at a 0.6 percent annual pace in the first quarter as an increase in inventories compensated for weaker consumer spending and a drop in business investment.
TradingEconomics.com, Bloomberg 4/30/2008 6:33:31 AM

The gain in gross domestic product, the sum of all goods and services produced, was more than forecast and matched the rate of growth in the previous three months, the Commerce Department reported today in Washington. The last time the economy grew less was in the fourth quarter of 2002.

Spending by households, the biggest part of the economy, grew last quarter at the slowest pace since 2001, when the U.S. was in a recession, as job losses mounted, food and fuel prices surged and property values tumbled. Federal Reserve policy makers are forecast to cut the benchmark interest rate today to limit the downturn.

Stock-index futures rose after the report and Treasury notes weakened. A private report showed separately today that companies unexpectedly added 10,000 workers in April. The ADP Employer Services report also showed private payrolls rose by a revised 3,000 the previous month.

Economists forecast a 0.5 percent gain in first-quarter growth, according to the median of 80 estimates in a Bloomberg News survey. Projections ranged from a gain of 1.5 percent to a 0.8 percent drop. The report is the first for the quarter and will be revised in May and June as more information becomes available.

The report's price index increased at an annual rate of 2.6 percent, lower than forecast, compared with a 2.4 percent gain in the prior quarter.

The Fed's preferred inflation gauge, which is tied to consumer spending and strips out food and energy costs, rose at a 2.2 percent pace, down from 2.5 percent.

Consumer spending, which accounts for about 70 percent of the economy, rose at a 1 percent annual pace, the smallest gain since the second quarter of 2001 and less than half the 2.3 percent increase in the previous quarter.

Americans have retrenched as employers cut payrolls by almost a quarter million workers so far this year, gasoline prices approached $4 a gallon and home foreclosures surged.

Companies also cut back. Business fixed investment, which includes spending on commercial construction and equipment and software, dropped at a 2.5 percent annual rate, the biggest decline since the first three months of 2004, after increasing 6 percent the prior quarter. Spending on new equipment and software fell at a 0.7 percent rate.

Investment in residential construction projects fell at an annual rate of 27 percent, the most since 1981. The drop took away 1.23 percentage points from GDP, after a 1.25 percent drag in the prior quarter. Housing has subtracted from growth since the first three months of 2006.

Companies added to stockpiles at a $1.8 billion annual rate, after an annualized decline of $18.3 billion in the final three months of 2007. The figures added 0.8 percentage point to growth. The buildup may give way to cutbacks in production in coming months as businesses try to clear unwanted stockpiles.

An improvement in trade continued to contribute to economic growth. The trade deficit narrowed to an annual pace of $495.9 billion last quarter from $503.2 billion. The smaller gap added 0.2 percent to growth, after a 1 percent boost the prior quarter.

The deterioration in housing, employment and consumer purchases prompted Fed Chairman Ben S. Bernanke this month to concede for the first time that a recession is possible.

Investors are betting the Fed will take a breather from its series of rate cuts after today's action, according to trading in futures markets, on concern inflation will accelerate.

Policy makers may also want time to gauge how the economy reacts to the rate reductions that started in September and to the tax rebate checks that began going out this week as part of the Bush administration's fiscal stimulus plan.

U.S. Economy Expanded at 0.6% in Q1