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US economy better than expected

Latest update : 2008-04-30

The U.S.'s first quarter 2008 growth rate was 0.6%, the same as last year's fourth quarter, and slightly better than expert forecasts. The report comes as the Federal Reserve considers yet another interest rate cut.

The US economy managed to avert the onset of recession as it struggled to grow at a 0.6 percent annual pace in the first quarter, government figures showed Wednesday.

The first estimate of gross domestic product was slightly better than expected and came amid fears that the world's biggest economy is headed for recession, generally defined as two consecutive quarters of declining activity.

The 0.6 percent growth rate was the same as in the fourth quarter of 2007, the Commerce Department report showed. It was slightly better than the 0.5 percent consensus forecast of private economists.

Analysts said the report was not as bad as some had feared but still worrisome.

"The headline figure was a bit better than anticipated but the details are still pretty soft," said Scott Brown, chief economist at Raymond James & Associates.

"It is consistent with the economy being pretty flat, but not falling off a cliff.

Consumer spending, the key driver of the economy, slowed to a 1.0 percent growth rate from 2.3 percent in the fourth quarter. It was the weakest growth in consumer activity since the 2001 recession.

Growth was helped by increasing exports and inventory building. Exports grew 5.5 percent after rising 6.5 percent in the fourth quarter. Inventories added 0.81 percentage points to growth after subtracting 1.79 percentage points in the fourth quarter.

Weakness in the housing market continued to be a major drag on growth. Real residential fixed investment fell 26.7 percent in the first quarter after falling 25.2 percent in the fourth quarter.

Business investment outside housing fell 2.5 percent in the quarter, the biggest drop in four years, following a 6.0 percent increase in the prior quarter.

Without the inventory adjustment, the economy would have seen a decline of 0.2 percent in the first quarter in a figure known as "real final sales."

A key price index linked to GDP fell to 3.5 percent from 3.9 percent, with core prices excluding food and energy rising at a 2.2 percent pace from 2.5 percent.

Without adjusting for inflation, the report shows that GDP -- the market value of the nation's output of goods and services -- increased 3.2 percent to a level of 14.185 trillion dollars.

The report represents the "advance" reading on GDP that will be revised twice in the next two months after more data is released, notably on trade.

The report comes as the Federal Reserve meets to consider a further cut in interest rates after slashing three percentage points from its federal funds rate since September.

Many analysts expect the Fed to cut the rate another quarter-point to 2.0 percent as insurance against a deep and prolonged downturn, and possibly signal a pause to assess the impact of its earlier cuts.

"It's still unclear from these numbers whether we're in a recession," Brown said. "Growth is pretty flat, and maybe it will be negative in the second quarter."

If a recession takes hold, Brown said the data suggest it will be shallow but that a recovery will be sluggish as well.

"We don't expect things to turn a corner and grow quickly," he said.

Economist Aneta Markowska at Societe Generale said the report paints a picture of an economy teetering on recession.

"Though technically positive, these are still extremely soft GDP readings," she said. "For the US economy which can potentially grow at about 2.75 percent, consistent growth below 1.0 percent should be considered recessionary."

Additionally, the outlook for the second quarter is troublesome, Markowska added.

"Chances to maintain a positive GDP reading in the second quarter are not evident in this data," she said. "Inventories will likely subtract from growth in the second quarter, housing will remain a drag and business spending is unlikely to recover in the near term."

Date created : 2008-04-30

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