Thursday, May 31, 2007

BEA Adjusts GDP Down to .6%

From Bloomberg

The U.S. economy grew last quarter at a 0.6 percent annual rate, the weakest in more than four years, as housing slumped, the trade deficit widened and businesses reduced inventories.

The gain in gross domestic product was weaker than the median forecast by economists and compares with a 1.3 percent pace initially estimated last month, according to revised figures from the Commerce Department today in Washington.

Last quarter may prove to be the low point for the economy as recent reports showed business spending improved and leaner stockpiles prompted factories to boost production, economists said. Such an outcome would bear out forecasts by Federal Reserve policy makers, who this month reiterated that growth will pickup for the rest of this year and into next.

``We're looking for a gradual firming in growth,'' Michael Feroli, an economist at JPMorgan Chase & Co. in New York, said before the report. ``The inventory situation is a lot more favorable, and the drag from housing will be reduced.''

From the BEA:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 0.6 percent in the first quarter of 2007, according to preliminary estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.5 percent.

The GDP estimates released today are based on more complete source data than were available for the advance estimates issued last month. In the advance estimates, the increase in real GDP was 1.3 percent (see "Revisions" on page 3).

The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE) and state and local government spending that were partly offset by negative contributions from private inventory investment, residential fixed investment, and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP growth in the first quarter primarily reflected an upturn in imports, downturns in exports and in federal government spending, and a deceleration in PCE for nondurable goods that were partly offset by an upturn in equipment and software, a smaller decrease in residential fixed investment, accelerations in PCE for durable goods and in PCE for services, and a smaller
decrease in private inventory investment.

Looking at the numbers we have the following.

Personal Consumption Expenditures increased at 4.4% seasonally adjusted annual rate. This is solid growth, and has been the backbone of the current economy.

Gross Private Domestic Investment decreased at a seasonally adjusted annual rate (SAAR) of 9.3%. Residential investment was the primary culprit, declining at a 15.4% SAAR.

Non-residential investment increased at a 2.9% SAAR. This is the weakest growth rate since the 4th quarter of 2003 and 1st quarter of '04.

Net exports decreased at a .6% seasonally adjusted annual rate while imports increased at a 5.7% SAAR.

Government spending increased at a 1% SAAR.

Let's see what the possibility of these trends continuing is.

PCEs had a bad April, with 79% of retailers reported disappointing earnings. However, the latest International Council of Shopping Centers weekly report showed a gain. So, consumers may have simply had a bad month. Tomorrow's income report will be very important.

There is sign business investment may be increasing. Last month's industrial production report showed a solid, across-the-board increase. We'll need a few more months of data before that trend is firmly in place.

Government expenditures come in waves, so expect to see this number rebound in the next few quarters.

Imports will be a drag on growth so long as the US is an oil importer. Exports will be less than imports for the foreseeable future.

So, going forward we need to pay special attention to two areas: consumer spending and business investment.