US GDP Growth Slows to Anemic 0.6% in First Quarter

The US Commerce Department released the country’s first quarter GDP growth figure yesterday, and it was a disappointing 0.6%. That was less than half the 1.3% government economists originally forecast, and it is the weakest growth rate the US has seen since the final quarter of 2002, when the rate was 0.2%. The Fed remains on guard for a burst of inflation, confident that there is more to worry about there than from the risk of recession. The Fed may well be wrong.

In support of the Fed’s belief is consumer spending, which accounts for about two-thirds of GDP. This grew 4.4%, exceeding the 3.8% forecast a month ago. New jobless claims dropped by 4,000 to 310,000, a bigger decline than expected. Also, business investment exceeded expectations by a bit; nonresidential investment was 0.9% higher than expected at 2.9%, and computer equipment and software investment rose 2% rather than the expected 1.9% (for those who see a 0.01% increase as meaningful).

Also, a great many analysts believe that the GDP figure was weighed down by temporary factors. For example, business inventories dropped. That means sales increased relative to business purchases to replenish stocks. Economist Kurt Karl of Swiss Re in New York told Reuters that inventories “really slowed down for the quarter. It is probably going to mean good news for the current quarter, though, because once you draw down the inventories it is harder to draw them down further, and the change in inventories is at least one part of this weakness.” Michael Woolfolk, senior currency strategist at Bank of New York, said, “It’s quite obvious the economy bottomed in the first quarter and this leaves us with a better base from which to bounce back.” Lehman Brothers senior economist Drew Matus said, “I think we’ll see second-quarter growth above 3% and 2.5% for all of 2007.” From their lips to God’s ear.

Yet there remains the big gorilla in the room. The housing sector is not at all well. New homebuilding dropped 15.4% in the first quarter and can only be seen as positive when measured against the expectation that it was going to drop 17%. New home spending in America has been down for the last six months. Worse, the value of the median home dropped for the first time since records were kept. The main asset owned by most American families depreciated. In the May 9 Fed Open Market Committee, members worried that the housing market would continue to drag on the economy.

Gas prices don’t help. The sudden climb to well above $3 a gallon has the same effect as a tax; it slows down economic activity. The more one spends on gasoline, the less one has to spend on cheeseburgers, iPods and movies. The oil companies profit nicely, but they aren’t very good at recycling their dollars through the economy as a whole.

Nevertheless, the Fed said inflation was the “predominant concern,” despite the evidence of less growth. The Fed’s key interest rate is 5.25%, and loads of economists believe that the FOMC will keep it at that level for the balance of the year. If so, they had better be right about the economy growing faster for the rest of the year because that rate looks high if gas doesn’t drop and housing doesn’t rise. In fact, it looks high enough to shave this quarter’s 0.6% GDP growth down to nothing (or less).

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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