Economy Avoids Recession
The government reported Wednesday that the U.S. economy grew at a rate of 0.6% in the first quarter of 2008, which was basically in line with expectations on Wall Street.
While GDP growth of 0.6% reflects sluggish activity in the U.S. economy as it muddles through a slowdown in the national housing market and a credit crunch on Wall Street, it also suggests that the nation did avoid recession in the first three months of the year, an outcome many investors were expecting.
Signs of resiliency in the economy also have implications for the
Federal Reserve
, which is
a quarter-point reduction to its federal funds rate target later in Wednesday's trading session. Many observers have concluded that the Fed, which has lowered rates by 300 basis points since the outbreak of the credit crisis last summer, will pause after Wednesday's policy decision and leave rates in place amid rising signs of inflation.
If the economy can escape the housing and credit crisis without sinking into a recession, the Fed may shift its focus back to promoting price stability instead of economic growth and raise rates back up quickly.
That said, signs of mounting problems for the U.S. economy are everywhere, despite continued GDP growth in the first quarter, suggesting it may well be too early to declare victory over the recession threat.
On Tuesday, Standard & Poor's reported that its Case-Shiller home price index of 20 cities fell by 12.7% in February versus last year, the largest decline since its inception in 2001. Seventeen of the 20 metro areas reported record annual declines.
Also, the Conference Board said that its Consumer Confidence Index, which declined sharply in March, fell again to 62.3 in April, down from the revised 65.9 last month and 76.4 in February. The consumer sentiment index, tracked by the University of Michigan, has also dropped to its lowest levels in over a quarter-century after the U.S. recorded three-straight months of declines in the job market.
Meanwhile, the components of Wednesday's GDP report from the Commerce Department did show some worrisome signs. Consumer spending, the nation's chief engine of economic growth, rose by just 1% for the quarter, down from the 2.3% growth rate in the previous quarter, which was the slowest reading since the second quarter of 2001.
Businesses cut back spending on equipment and software at a 0.7% pace, and they restrained spending on commercial construction at a 6.2% pace.
On the bright side, businesses boosted their investment in inventories in the first quarter, and exports of U.S. goods and services, boosted by the weakening dollar, also helped first-quarter growth. Spending by the government rose at 2% for the second quarter in a row.
"Overall, soft and softening, with worse to come in the wake of the collapse in consumer confidence," said Ian Shepherdson, chief U.S. economist with High Frequency Economics, in a note to clients.