By Jennifer Yousfi
Real gross domestic product (GDP) increased at an annual rate of 0.9% in the first quarter, the Bureau of Economic Analysis (BEA) announced yesterday (Wednesday).
"We are somewhere in the twilight zone between an expansion and a recession," Michael Feroli, an economist at JPMorgan Chase & Co. (JPM) in New York, told Bloomberg News. "We will have a poor pace of growth through the year."
The preliminary estimate of GDP represents an increase from the Apr. 30 advance estimate of 0.6% and is based on more complete economic information.
Economic expansion was primarily due to a boost in exports due to the combination of a weak dollar and strong overseas sales. Imports also declined, as the trade deficit shrank to its lowest level in five years.
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The slight boost in GDP could be just what the U.S. Federal Reserve needs to hold off on any further interest rate cuts.
"The underlying domestic demand in the economy showed slight improvement. It's probably consistent with the Fed being on hold in June and several months after that," Nick Bennenbroek, currency strategist with Wells Fargo & Co. (WFC) in New York, told Reuters.
The Fed's aggressive rate-cutting campaign has brought the Fed Funds rate down to 2.00% from 5.25% last September. But while it seems the cuts are helping the U.S. economy skirt a true recession – defined as two consecutive quarters of negative GDP growth – those same cuts have added fuel to the inflation fire.
The minutes of the last policymaking Federal Open Market Committee (FOMC) meeting showed that the Fed's inflation forecast was raised from a range of 2.1%-2.4% to a range of 3.1%-3.4%.
And many analysts, including Money Morning Contributing Editor Martin Hutchinson, feel the Fed will need to raise rates to combat that escalating inflation.
"The nation's central bank will soon have to reverse course and start raising interest rates – and probably in a hurry, too, if the Fed wants to keep oil prices on this side of the stratosphere," Hutchinson said in a recent Money Morning investment analysis.
And with the economy still growing, even at a sluggish pace, the Fed might be able to take Hutchinson's advice. The upward revision to GDP comes close on the heels of other recent economic reports that were better than expected, including April durable goods orders and April retail sales.
"Data reported so far point to continued expansionary growth in the second quarter," Sam Bullard, a Wachovia Corp. (WB) economist in Charlotte, North Carolina, said in a research report, Reuters reported.
The economic stimulus checks sent out to over 130 million U.S. households could provide a nice boost to the economy. 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.
The third (and final) estimate for first quarter GDP will be released on June 26.
News and Related Story Links:
Bureau of Economic Analysis:
Gross Domestic Product: First Quarter 2008 (Preliminary)
U.S. Economy Expands Faster Than Previously Estimated
GDP growth revised higher, Central bankers projected that prices would rise in 2008 at an annual rate of 3.1 percent to 3.4 percent, far faster than the year before. jobless claims up
GDP Holds Steady at 0.6% in the First Quarter
Is the Fed Fueling the Inflation Fire?