U.S. Economy: First Quarter May Have Been Low Point (Update3)
By Shobhana Chandra
May 31 (Bloomberg) -- The U.S. economy grew last quarter at the slowest pace in more than four years, a 0.6 percent annual rate that may prove to have been the low point of the expansion.
The gain in gross domestic product, announced by the Commerce Department today in Washington, was lower than the 0.8 percent rate economists had forecast, and less than the government's previous 1.3 percent estimate. A private report from Chicago today showed a jump in business activity, while figures since the end of March show a rebound in corporate spending and consumer confidence.
Traders further reduced bets that Federal Reserve Chairman Ben S. Bernanke will need to cut interest rates this year. The prospect of a recession, given a one-in-three chance by former Fed Chairman Alan Greenspan, looks less likely as business investment and manufacturing strengthen.
The reports ``signify a clearing of the decks for a better performance going forward,'' said Carl Tannenbaum, chief economist at LaSalle Bank in Chicago and president of the National Association for Business Economics.
The yield on the benchmark 10-year note increased 2 basis point from yesterday to 4.89 percent at 5 p.m. in New York. The yield rose as much as 4 basis points. The dollar pared its decline against the euro.
Jobs, Construction
Also today, a Labor Department report showed the number of Americans filing claims for jobless benefits unexpectedly fell last week. Meanwhile, the Commerce Department said construction spending rose 0.1 percent in April and was revised higher the prior month. Analysts had expected no change.
``The winter near-pause in the economy has given way to a rebound,'' said Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh.
The National Association of Purchasing Management-Chicago's business barometer rose to 61.7 in May, higher than economists forecast, from 52.9 the prior month. Readings greater than 50 signal expansion.
Analysts anticipated a 0.8 percent gain in GDP last quarter, according to the median of estimates in a Bloomberg News survey. Forecasts ranged from increases of 0.1 percent to 1.8 percent. The economy grew at a 2.5 percent pace in the final three months of last year.
`Sustained Growth'
``It's a good number for the Fed,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. ``We do have sustained growth, do have profit growth and inflation is still not high enough to get the Fed to move'' interest rates.
The Fed's preferred inflation measure, which is tied to consumer spending and strips out food and energy costs, rose at a 2.2 percent annual rate, the same as previously estimated.
Bernanke is among policy makers who have said a 1 percent to 2 percent range is preferable. In minutes of the central bank's May 9 meeting released yesterday, Fed officials continued to view inflation as the biggest risk to the economy.
Today's revisions to GDP reflected a bigger trade deficit and fewer inventories than the government estimated last month. The trade deficit widened to an annual pace of $611.8 billion, subtracting 1 percentage point from GDP, twice as much as previously estimated.
Companies reduced stockpiles at a $4.5 billion rate last quarter compared with initial estimates of a $14.8 billion gain. The figures subtracted another percentage point from growth.
Consumer Spending
A jump in consumer spending last quarter was one of the few things that kept the economy growing. The increase in spending, which accounts for about 70 percent of gross domestic product, was revised up to an annual rate of 4.4 percent, the biggest gain in a year, from an initial estimate of 3.8 percent.
A rebound in business investment is contributing to a more optimistic outlook for the second quarter even as consumer spending moderates, economists said. Orders for durable goods recorded a third straight gain last month, the longest streak in almost two years.
Housing was less of a drag last quarter than previously projected, subtracting 0.9 percentage point from growth, compared with the initial estimate of 1 percentage point. Home construction fell at an annual rate of 15.4 percent last quarter, after contracting by 19.8 percent in the previous three months.
Builder Pessimism
``The homebuilding environment remains difficult,'' Richard Dugas, chief executive officer of Pulte Homes Inc., said in a statement this week. Pulte, the third-largest U.S. homebuilder, plans to fire 16 percent of its staff after it reported a first- quarter loss.
Rising foreclosures and mortgage defaults by borrowers with poor or limited credit history are adding to concerns the housing recovery may take longer, economists said.
In minutes of their May 9 meeting, Fed officials acknowledged they underestimated the length of the housing recession. Still, they said the risks from the fallout of the subprime lending crisis and the previous slump in business investment ``were judged to have diminished slightly.''
Growth will accelerate to an annual pace of 2.2 percent this quarter, based on the median estimate of economists surveyed earlier this month by Bloomberg News.
Some have boosted their forecasts since then. Economists at Morgan Stanley today projected the economy will expand at a 3.4 percent pace, a percentage point more than they forecast at the beginning on the month. UBS Securities LLC's growth estimate has climbed to 2.3 percent from 1.8 percent.
Profits
Today's GDP report included a first look at corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, rose 1.2 percent to an annualized $1.67 trillion. For all of last year, profits were up 21 percent.
The government also issued updated income figures for the previous two quarters. Personal income was revised up by $31 billion for the fourth quarter of 2006, boosting the gain over the previous quarter to an annual rate of 5.9 percent from 4.7 percent.
The increase suggests either payrolls last quarter were undercounted or employees were paid more than previously estimated, economists said.
By Shobhana Chandra
May 31 (Bloomberg) -- The U.S. economy grew last quarter at the slowest pace in more than four years, a 0.6 percent annual rate that may prove to have been the low point of the expansion.
The gain in gross domestic product, announced by the Commerce Department today in Washington, was lower than the 0.8 percent rate economists had forecast, and less than the government's previous 1.3 percent estimate. A private report from Chicago today showed a jump in business activity, while figures since the end of March show a rebound in corporate spending and consumer confidence.
Traders further reduced bets that Federal Reserve Chairman Ben S. Bernanke will need to cut interest rates this year. The prospect of a recession, given a one-in-three chance by former Fed Chairman Alan Greenspan, looks less likely as business investment and manufacturing strengthen.
The reports ``signify a clearing of the decks for a better performance going forward,'' said Carl Tannenbaum, chief economist at LaSalle Bank in Chicago and president of the National Association for Business Economics.
The yield on the benchmark 10-year note increased 2 basis point from yesterday to 4.89 percent at 5 p.m. in New York. The yield rose as much as 4 basis points. The dollar pared its decline against the euro.
Jobs, Construction
Also today, a Labor Department report showed the number of Americans filing claims for jobless benefits unexpectedly fell last week. Meanwhile, the Commerce Department said construction spending rose 0.1 percent in April and was revised higher the prior month. Analysts had expected no change.
``The winter near-pause in the economy has given way to a rebound,'' said Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh.
The National Association of Purchasing Management-Chicago's business barometer rose to 61.7 in May, higher than economists forecast, from 52.9 the prior month. Readings greater than 50 signal expansion.
Analysts anticipated a 0.8 percent gain in GDP last quarter, according to the median of estimates in a Bloomberg News survey. Forecasts ranged from increases of 0.1 percent to 1.8 percent. The economy grew at a 2.5 percent pace in the final three months of last year.
`Sustained Growth'
``It's a good number for the Fed,'' said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina. ``We do have sustained growth, do have profit growth and inflation is still not high enough to get the Fed to move'' interest rates.
The Fed's preferred inflation measure, which is tied to consumer spending and strips out food and energy costs, rose at a 2.2 percent annual rate, the same as previously estimated.
Bernanke is among policy makers who have said a 1 percent to 2 percent range is preferable. In minutes of the central bank's May 9 meeting released yesterday, Fed officials continued to view inflation as the biggest risk to the economy.
Today's revisions to GDP reflected a bigger trade deficit and fewer inventories than the government estimated last month. The trade deficit widened to an annual pace of $611.8 billion, subtracting 1 percentage point from GDP, twice as much as previously estimated.
Companies reduced stockpiles at a $4.5 billion rate last quarter compared with initial estimates of a $14.8 billion gain. The figures subtracted another percentage point from growth.
Consumer Spending
A jump in consumer spending last quarter was one of the few things that kept the economy growing. The increase in spending, which accounts for about 70 percent of gross domestic product, was revised up to an annual rate of 4.4 percent, the biggest gain in a year, from an initial estimate of 3.8 percent.
A rebound in business investment is contributing to a more optimistic outlook for the second quarter even as consumer spending moderates, economists said. Orders for durable goods recorded a third straight gain last month, the longest streak in almost two years.
Housing was less of a drag last quarter than previously projected, subtracting 0.9 percentage point from growth, compared with the initial estimate of 1 percentage point. Home construction fell at an annual rate of 15.4 percent last quarter, after contracting by 19.8 percent in the previous three months.
Builder Pessimism
``The homebuilding environment remains difficult,'' Richard Dugas, chief executive officer of Pulte Homes Inc., said in a statement this week. Pulte, the third-largest U.S. homebuilder, plans to fire 16 percent of its staff after it reported a first- quarter loss.
Rising foreclosures and mortgage defaults by borrowers with poor or limited credit history are adding to concerns the housing recovery may take longer, economists said.
In minutes of their May 9 meeting, Fed officials acknowledged they underestimated the length of the housing recession. Still, they said the risks from the fallout of the subprime lending crisis and the previous slump in business investment ``were judged to have diminished slightly.''
Growth will accelerate to an annual pace of 2.2 percent this quarter, based on the median estimate of economists surveyed earlier this month by Bloomberg News.
Some have boosted their forecasts since then. Economists at Morgan Stanley today projected the economy will expand at a 3.4 percent pace, a percentage point more than they forecast at the beginning on the month. UBS Securities LLC's growth estimate has climbed to 2.3 percent from 1.8 percent.
Profits
Today's GDP report included a first look at corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, rose 1.2 percent to an annualized $1.67 trillion. For all of last year, profits were up 21 percent.
The government also issued updated income figures for the previous two quarters. Personal income was revised up by $31 billion for the fourth quarter of 2006, boosting the gain over the previous quarter to an annual rate of 5.9 percent from 4.7 percent.
The increase suggests either payrolls last quarter were undercounted or employees were paid more than previously estimated, economists said.
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