Wednesday, April 30, 2008

A Misleading Signal on First-Quarter GDP

From Kiplinger

By Jerome Idaszak, Associate Editor, The Kiplinger Letter

Don't be too heartened by the news that the economy didn't shrink last quarter. What looks like good news actually signals deeper trouble ahead. Thank inventory growth for the positive first-quarter growth in Gross Domestic Product (GDP). If it weren't for that jump, which contributed about an eight-tenth of a percentage point to GDP, the 0.6% overall growth rate would have been negative. But that means, during this quarter, businesses will work through the inventory piled up on shelves of stores and warehouses, rather than order more goods, cutting into second-quarter GDP growth.
The positive first quarter belies the fact that the economy is in a mild recession. The key yardstick is employment, and in that respect, the picture isn't pretty. There has been a net job loss of about 230,000 in the first three months of the year. Friday's employment report is likely to indicate that another big chunk of jobs evaporated in April.
Moreover, total consumer spending rose a paltry 1% over the January-March period, compared with an increase of 2.3% in the fourth quarter of last year. Spending on durable goods declined by more than 6%. Previous quarter, spending on cars, appliances and other durables rose about 2%. In another sour note, business investment fell 2.5%, after racking up a 6% gain at the end of 2007. And housing remains a giant drag, with residential construction again shrinking more than 25%.
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