Surprise Growth for the US

May 1, 2008

Surprise 0.6% GDP growth for US in first quarter
Export sales and inventory growth help stave off economic slump

WASHINGTON - A BUILD-UP in inventories kept the United States economy afloat in the first quarter despite the weakest consumer spending since 2001 and the biggest drop in homebuilding in more than 26 years, a government report showed yesterday.

The Commerce Department said gross domestic product (GDP) expanded at a 0.6 per cent annual rate in the first quarter, matching the fourth quarter's advance and handily topping a forecast for 0.2 per cent growth in an advance poll of economists.

An improvement in trade continued to contribute to economic growth.

Some economists said the report suggested the US economy was on a bit firmer ground than had been thought, but others were still bracing themselves for worse times ahead as businesses ratchet back production further to try to sell-off inventories.

'We expect that the coming inventory correction will send growth into negative territory, save a truly heroic effort by the US consumer to spend their way out of the current malaise with their US$600 (S$817) rebates,' said Mr Joseph Brusuelas, US chief economist at IDEAglobal in New York.

Tax rebate cheques that are part of a government economic stimulus programme began to flow this week to upwards of 100 million Americans.

Separately, ADP Employer Services said US private-sector employers added 10,000 jobs last month, another surprise on the upside since forecasts had been for 60,000 jobs to be lost. The reports were issued just before Federal Reserve policymakers began a second day of deliberations that is expected to result in a decision to trim official interest rates another quarter percentage point to try to keep expansion going.

Analysts said they still expected a rate reduction.

GDP is the broadest measure of total economic activity within US borders and, despite a better-than-expected first-quarter performance, details of the report reflect widespread weakening that many analysts fear will lead to a recession.

The GDP figures are an initial measure of first-quarter performance and will be revised twice in coming months. Consumer spending that fuels two-thirds of economic activity through consumption of goods and services, grew at the weakest rate since the second quarter of 2001, when the economy was last in recession.

It rose at a 1 per cent rate after growing 2.3 per cent in the fourth quarter. The weakening in an already distressed housing sector was even more striking. Spending on residential construction plunged at a 26.7 per cent rate - a ninth straight quarterly decline and the biggest for any three months since the end of 1981.

A build-up in business inventories, which bolsters growth in the period in which it occurs, helped the economy keep growing in the first quarter.

Stocks of unsold goods rose at a US$1.8 billion annual rate in the first quarter after shrinking at an US$18.3 billion rate in the final quarter of last year. There was a slight moderation in the rate of price rises. Personal consumption expenditures excluding food and energy items - a key gauge of core inflation that is favoured by the Fed - rose at a 2.2 per cent rate after increasing 2.5 per cent in the fourth quarter.
REUTERS