GDP Holds Steady at 0.6% in the First Quarter

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By Jennifer Yousfi
Managing Editor

The U.S. economy averted recession in the first quarter, as real gross domestic product (GDP) for the U.S. economy grew 0.6% in the first quarter, the Bureau of Economic Analysis announced yesterday (Wednesday).

"The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE) for services, private inventory investment, exports of goods and services, and federal government spending that were partly offset by negative contributions from residential fixed investment and PCE for durable goods" the statement read.

The advance figure represents the first of three estimates for first quarter GDP that will be released and was unchanged from the final fourth quarter estimate of 0.6%. But despite the unexpected growth, there was little good news for the economy in the report.

"No one would confuse this with a healthy economy," wrote Douglas Porter, an economist for BMO Capital Markets, MarketWatch reported.

The estimate was three times the mean expected rate of 0.2% growth, and economists seemed to agree the difference was due to the unexpected growth in inventories in the month of March. Analysts were quick to warn that if domestic companies do not sell through the current inventory backlog, it could mean weakness in the coming quarters.

"If you were to take out the swing in inventories, these numbers would be negative," MarkVitner, senior economist at Wachovia Corp. (WB) in Charlotte, North Carolina, said in an interview with Bloomberg Television. "We think we’re in recession, but I don’t know that the GDP numbers are going to turn negative at all in 2008."

Positive GDP for the first quarter might mean the United States hasn’t fallen into a textbook recession, but many economists feel the financial environment continues to deteriorate. [Please click here for a related story in today’s issue on the U.S. Federal Reserve’s rate cut decision yesterday, due to the current state of the economy.]

"Without a doubt, some will find reason to celebrate that we avoided a recession in the first quarter," Bernard Baumohl of the Economic Outlook Group, told Forbes, adding that the economic and financial crises are not over. "We may not be formally in a recession based on the preliminary GDP data (but) there should be no doubt this country is struggling within a recessionary environment."

Indeed, while the economy produced more goods and services in the first quarter, many of those goods ended up in warehouses without translating into sales. It’s unlikely we’ll see a similar buildup of inventory in the second quarter, which would translate into lower or negative GDP growth for the quarter ended June 30.

"The consumer is pulling back," Nigel Gault, chief U.S. economist at Global Insight Inc., a Lexington, Massachusetts-based forecasting firm, told Bloomberg. "We are probably going to have a negative second quarter as businesses start running down inventories. Weakness in housing will continue."

The one thing that could boost second quarter GDP are the economic stimulus checks being sent out to over 130 million U.S. households. If consumers spend that money, rather than using it to pay down debt or pad their savings, it could turn into a nice shot of growth for GDP in the second quarter.

"If households keep spending, even modestly, it is likely that growth in the second quarter will be positive as well," said Joel Naroff, president and chief economist of Naroff Economic Advisors in a note to clients yesterday.

However, Naroff added that the stimulus checks were a temporary fix and "we could see a relapse once the government-induced sugar high disappears." 

The advance GDP estimate is based on data that is either incomplete or subject to possible revision. The second "preliminary" estimate of GDP will be released May 29.

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