GDP Slowdown No Reason for Panic

If the Federal Reserve raises interest rates next week, as widely expected, it will do so at a time when the U.S. economy appears to be moderating. But many economists said they're not worried.

Gross domestic product grew 3.9% in the first quarter, according to the Commerce Department, down from the 4.1% pace reported in the fourth quarter and below the sizzling 8.2% growth in the third quarter.

The downward revision to GDP surprised economists, who had expected it to be unchanged at 4.4%. While the report is largely considered old news, it does come on the heels of a disappointing durable goods report and higher-than-expected unemployment claims.

Durable goods fell 1.6% in May after a 2.6% decline in April. Meanwhile, initial unemployment claims rose 13,000 in the latest week, pushing the four-week moving average up 1,000 to 344,250.

Joseph Abate, an economist at Lehman Brothers, said that, at most, the data show a pause in activity, not a retrenchment. He is looking for 4.8% growth in the second quarter, 4.2% growth in the third, and 4.5% in the final three months of the year.

"What caused the revision [to first-quarter GDP] was a surge in imports, which reflects strong consumer demand and business demand for capital equipment," he said. Imports act as a drag on GDP.

GDP would have been higher if not for the deterioration in the trade balance. The Commerce Department said the trade deficit widened to a record $48.3 billion in April.

Asha Bangalore, economist at Northern Trust, said it's too soon to tell whether the economy is moderating. "I think it's premature to make a judgment," she said. "We need to see some of the June numbers."

Investors won't have to wait long for those. The coming week will bring the Institute for Supply Management's manufacturing index for June and the all-important employment report. Economists are expecting nonfarm payrolls to rise 240,000 after climbing by 248,000 in May. The ISM index is expected to dip slightly to 61.2 in June from 62.8 in the prior month.

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