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GDP Expands Slightly Amid Gloomy Signs
May 1, 2008
The economy expanded slightly in the first quarter, but its faint pulse didn't allay concerns the U.S. is in or headed toward recession.
The gross domestic product -- the nation's total output of goods and services -- increased at a 0.6% annual rate, the same as in the fourth quarter of 2007. But underlying data -- on consumer spending, business investment and construction -- paint a picture of a deteriorating economy, one that expanded only because of a rise in exports and a buildup of inventories.
Excluding inventories, GDP shrank at a 0.2% pace, the first contraction in more than 16 years. Excluding inventories and exports, the economy contracted at a 0.4% rate after increasing 1.3% in the fourth quarter.
"It would be a grave mistake to interpret [the GDP] number as even suggesting the economic and financial crisis is over," said Bernard Baumohl, managing director of the Economic Outlook Group LLC. "Clearly, this economy will remain in a recessionary environment for the rest of the year."
Many economists said the economy is likely to contract this quarter. Morgan Stanley economists predict GDP will decline 2%. Forecasters said the rebate checks being distributed by the government should help spur consumer spending, which accounts for more than two-thirds of GDP. But they disagree over how big the impact will be and whether it will occur this quarter or sometime in the second half.
Second-quarter GDP "will probably be negative but will certainly get some support from the rebate checks," said Nigel Gault, chief U.S. economist at Global Insight, a Waltham, Mass., forecasting firm. But, he said, "My worry is that once the impact [of the stimulus checks] fades away, we're still looking at the same underlying problems."
Those problems -- the housing crisis and credit mess, and soaring energy and food prices -- are battering consumers, and the toll is evident in the latest GDP figures. Spending by consumers, who are gloomier than they have been in decades, rose 1% at an annual rate, its weakest performance since 2001. A new Wall Street Journal/NBC News poll found that 81% of Americans think the U.S. is in a recession.
Purchases of durable goods -- big-ticket items such as cars, appliances and home electronics that are intended to last for three years or more -- plummeted at a 6.1% pace in the first quarter after increasing 2% in the fourth quarter.
Meanwhile, capital spending dropped at a 2.5% rate after rising 6% in the previous quarter. And export growth was less of a boon to GDP than in past quarters.
The buildup of inventories boosted GDP by nearly a full percentage point, but partly reflected weak sales that could lead to production cutbacks down the road. Government defense spending also bolstered first-quarter growth. Housing, meanwhile, continued to plummet, chopping more than a percentage point off first-quarter growth.
"The pain that consumers and businesses are experiencing is real," said Mark Vitner, senior economist at Wachovia Corp.
Mr. Vitner had been reluctant to say the economy was contracting, but now believes the U.S. is in a recession. "One thing that puts us in that camp is the run-up in energy prices and the likelihood they're going to remain high," he said. "That leaves everyone with less money to spend on anything else."
The U.S. could experience a recession this year even if the downturn doesn't comply with the common rule of thumb that defines a recession as two consecutive quarters of negative GDP. The National Bureau of Economic Research, the nonprofit group that is the official arbiter of when recessions begin and end, defines a recession as a period of significant decline in economic activity -- including GDP, income, employment and retail sales -- that lasts more than a few months.
One positive sign in the report: Inflationary pressures remain at bay. The price index for personal consumption expenditures in the first quarter rose 3.5% from a year ago; that compared with a 3.9% increase in the fourth quarter. Excluding food and energy, the price gauge rose 2.2% from a year ago, compared with 2.5% in the fourth quarter.
A separate report showed U.S. labor costs -- also a gauge of inflation -- increased at their slowest pace in two years. The employment-cost index rose 0.7% in the first quarter, the Labor Department said. Wages and salaries increased 0.8% and benefit costs advanced 0.6%.
Write to Kelly Evans at kelly.evans@wsj.com
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