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Jerry Hansin 29 May 2008 World News | 2 Comments

US economic growth revised higher to 0.9% pace
Posted: 29 May 2008 2258 hrs

WASHINGTON: US economic momentum posted a 0.9 percent annual growth pace in the first quarter of the year, the government said on Thursday in a report which calmed the nerves of some economists.

In its initial revision of first quarter gross domestic product (GDP), the Commerce Department hiked its estimate compared with an prior assumption that pegged growth at a lacklustre 0.6 percent.

The revision, largely in line with expectations, bolsters the stance of some economists who believe the world’s largest economy will avoid a recession despite a deep housing slump, a related credit crunch and soaring oil prices.

A recession, which last hit the US in 2001, is typically defined as two straight periods of negative economic activity. The Federal Reserve has been trying to avert an economic slump by aggressively slashing interest rates.

Although first quarter growth marked the strongest period of economic activity since the third quarter of 2007, growth remains sub-par for the world’s top economic powerhouse.

“The overall GDP growth rate is still indicative of a sluggish economy on the cusp of recession,” said Paul Ferley, an economist at RBC Capital Markets.

Some analysts expect second quarter growth to come in around 1.0 percent and say the economy is not running on all cylinders.

With the first quarter now in the rear view mirror, they are also waiting to see how much lift is delivered by a giant 168-billion-dollar economic stimulus.

Ferley said tax rebates stuffed into the stimulus will likely underpin consumer spending.

The improved revision was mainly fuelled by consumer spending on services, the exports of goods and services and government spending, the report said.

The depressed housing market continued acting as a drag on the economy, as did reduced consumer spending on durable goods, which includes big-ticket manufactured products such as cars, televisions and large household appliances.

The revised reading left consumer spending, a critical driver of economic growth, pegged at a 1.0 percent growth rate which marked a considerable moderation from the fourth quarter’s 2.3 percent.

Consumer spending on services showed a 3.0 percent growth clip compared with a lesser 2.8 percent in the fourth quarter of last year, but spending on durable goods declined 6.2 percent against a positive 2.0 percent in the prior quarter.

Americans appear to have cut back on big-ticket purchases as the housing meltdown, a tighter credit environment and rocketing fuel costs singe their budgets.

Spending on durable goods dived to its weakest depths since the fourth quarter of 2005.

“The report hardly portrays a healthy economy. The economy is far from out of the woods,” said Nigel Gault, an economist at Global Insight.

Real residential fixed investment, which tracks new home construction, slumped 25.5 percent during the quarter after falling a similar 25.2 percent during the last three months of 2007.

Business spending outside housing declined 0.2 percent in the quarter, following a 6.0 percent gain in the prior three month period.

The combined exports of goods and services added 0.80 percentage points to growth, partly as exports were propped up by the ailing dollar.

Exports grew 2.8 percent during the period while imports fell 2.6 percent. Some imported goods have become more pricey for Americans to purchase because the dollar has fallen sharply in value against foreign currencies.

An inflation barometer in the report showed a key price index linked to GDP rose 3.5 percent while core prices, excluding food and energy costs, rose at a 2.1 percent clip.

Although both readings have cooled somewhat from the fourth quarter, economists said the Fed remains worried about inflationary pressures, particularly as oil prices have soared to record peaks above 135 dollars a barrel this month.

First quarter growth will be revised a final time in coming weeks. – AFP/de

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