Economy Weak Despite Upward GDP Revision

Lower imports helped boost the first-quarter figure, but experts say they're not a sign of a growing economy.

By Jerome Idaszak, Associate Editor, The Kiplinger Letter

May 29, 2008

The economy grew a little bit more in the first quarter than reported a month ago, but the change is slight, with housing continuing to be a big drag and consumer spending at its lowest level since the 2001 recession. With $120 billion worth of tax rebate checks working their way through the economy over the next few months, consumer spending will improve a bit. But economic growth this year will be a struggle, especially in the face of skyrocketing energy costs.

The numbers won't change any minds of Federal Reserve policymakers, who described their decision to cut interest rates April 30 as "a close call" and have signaled that they want to hold rates steady for a while to monitor the impact of surging oil and gasoline prices on inflation pressures. The Fed expects a weak economy this year marked by sluggish consumer spending.

There are some positive signs, such as the May 28 report on durable goods orders, which showed solid increases in several categories, including electrical equipment, primary metals and machinery. Those increased orders will help output this quarter.

The Commerce Department said May 29 that gross domestic product increased 0.9% in the first quarter. Its previous estimate was 0.6%. The upward revision was due to lower than estimated imports and business investment that stayed flat instead of declining 2.5%, as was previously reported.

The drop in imports may make the GDP number appear to be stronger, but it's actually a sign of economic weakness. In fact, final sales, which include imports but not inventories and exports, shrank 0.1% in the quarter.

The broadest measure of consumer spending, which accounts for about 70% of GDP, increased a meager 1%, its smallest gain since it rose 1% in the second quarter of 2001, when the economy was last in recession.

Spending on housing subtracted a bit more than 1% from GDP for the third quarter in a row. Housing has been subtracting from growth since the first quarter of 2006.

Business investment in buildings and equipment, previously showing a 2.5% decline, was revised to show a negative 0.2%. Exports, on the other hand, weren't quite as strong -- up 2.8%, not 5.5% as initially estimated. Federal government spending helped, up 4.4%, with a strong boost from defense.

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