http://dailynews.yahoo.com/h/ap/20010427/bs/economy_246.html

Link

Friday April 27 10:53 AM ET

GDP Grows at 2 Percent Annual Rate

By MARTIN CRUTSINGER, AP Economics Writer

WASHINGTON (AP) - The U.S. economy, helped by resilient consumers and an improving trade performance, posted stronger-than-expected growth in the first three months of this year, a period when it had been feared the country could slip into recession.

The Commerce Department (news - web sites) said Friday that the gross domestic product - the country's total output of goods and services - advanced at an annual rate of 2 percent from January through March.

Not only did the GDP (news - web sites) remain in positive territory, but the 2 percent pace was double the 1 percent growth rate of the final three months of 2000 and also double what many analysts had been expecting for the first quarter.

The positive GDP report brought smiles to the Bush administration, which had been concerned that the economy could dip into recession in President Bush (news - web sites)'s first months in office.

``It is a wonderful, sunny day here in Washington and our 2 percent real growth rate in the first quarter is nothing but good news compared to what most people expected,'' Treasury Secretary Paul O'Neill told reporters.

Stock prices rose in early trading Friday, with the Dow Jones industrial average up nearly 70 points in the first hour.

Federal Reserve (news - web sites) Chairman Alan Greenspan (news - web sites) had worried earlier this year that economic growth might have stalled out altogether, ending the country's record 10-year-long economic expansion. The Fed in January began cutting interest rates aggressively in an effort to ward off a downturn.

With a positive GDP, many economists believe the United States may have escaped the period of maximum danger for a recession. They are looking for growth to improve further in coming quarters.

However, more pessimistic analysts contend that the threat of a recession remains, with the possibility that rising unemployment in coming months could yet precipitate a plunge in consumer spending.

``Consumers are holding their own,'' Merrill Lynch chief economist Bruce Steinberg said of Friday's report. But he projects consumers will tighten their belts in the second and third quarters as the labor market weakens.

``If layoffs mount and payrolls begin to contract sharply, consumer spending will weaken further. At that point, the economy would be in recession,'' Steinberg said.

But other analysts believe that Greenspan and his colleagues, with their four interest rate cuts so far this year and more expected, will be able to keep consumer and investor confidence from going into a nosedive.

Analysts say the central bank will have room to cut rates further because inflationary pressures have been easing, as measured by the Consumer Price Index (news - web sites).

However, an inflation gauge tied to the GDP did not paint as reassuring a picture. It showed prices rising at an annual rate of 3.3 percent in the first quarter, the fastest pace in a year, reflecting higher costs for services such as medical care and for natural gas and electricity.

The 2 percent GPD growth rate in the January-March quarter reflected strength in consumer spending, which was rising at an annual rate of 3.1 percent. That reflected a huge jump in spending on durable goods - such as cars, appliances and furniture - which soared at an annual rate of 11.9 percent after having shrunk at an annual rate of 3.1 percent in the fourth quarter.

A big drop in consumer spending on autos in the final three months of last year and weak Christmas sales had been major factors leading economists to fear that the country was heading into a downturn.

The boost in consumer spending contributed more than 2 percentage points to growth in the first quarter. Another big positive factor was a narrowing trade deficit, reflecting a drop in imports, which added 1.4 percentage points to growth, the first positive contribution from trade in more than two years.

Other boosts to growth came from a rebound in housing construction and strong spending by governments.

The biggest drags on growth in the first quarter came from a continuing effort by businesses to reduce an overhang of unsold goods. The drop in inventories subtracted 2.5 percentage points from growth.

A drop in business investment on computers and other equipment, which the Fed cited as a new worry in its latest rate cut, subtracted 0.2 percentage point from growth in the first quarter.

While the 2 percent GDP growth was double what had been expected for the first quarter, it still left the U.S. economy performing far below levels of a year ago. In the first half of 2000, the economy soared at an annual rate of 5.2 percent.

However, last summer, under the impact of six interest rate increases engineered by the Fed to keep inflation under control, growth slowed to a rate of just 1.6 percent in the second half of 2000.

The various crosscurrents in the first quarter left overall GDP rising at a 2 percent annual rate, an increase that amounted to an extra $46.2 billion in output at an annual rate after adjusting for inflation, pushing total GDP to $9.44 trillion.

Before adjusting for inflation, total economic output in the first quarter was growing at an annual rate of $10.24 trillion.

-- (M@rket.trends), April 27, 2001

Answers

That GDP number for the first quarter will be subject to two more revisions, almost certainly downward as much more data (especially from March, a bad month) gets incorporated. Most analysts expect the final number to be in the 1.0 to 1.5% range. Briefing.com, which runs the market analysis pages for Yahoo! Finance, expects GDP growth in Q2 to be negative. I agree. By most indicators, the economy is slowing. The weekly jobless claims are rising; the latest number was 408K, and typically 450K or so signals recession. And remember that unemployment is a lagging indicator. A more current indicator is consumer sentiment, and the latest Conference Board survey and the U. of Michigan survey (the most reliable) both show a sharp drop in consumer confidence in April. Basic mfg. (with the possible exception of some parts of the auto industry) remains mired in deep recession, with the PMI number way below 50 (anythihg below 50 signals a contraction) and no sign yet of recovery; the tech industry is still a mess, as Cisco CEO Chambers and Intel CEO Barrett will admit, at least on their more honest days. The tech wreck has now spread to Europe and Asia, insuring further global slowdown, as the World Bank noted the other day. Granted, the tech industry accounts for only 5.4% of the U.S. economy, though that may not be much consolation to Nasdaq investors who saw almost $5 trillion in "paper wealth" wiped out in a year on the Nasdaq. Regardless, the tech industry is key to enhancing overall worker productivity. Increased worker productivity has been Greenspan's rationale for accommodating Wall Street and increasing the M3 (broad) money supply as though there's no tomorrow (M3 over the past 9 months has increased at a staggering 13% annualized rate). Frankly, the increase in U.S. worker productivity has never been nearly as much as touted--it went from 1.5% per year in the 1980s to, at most, 3% or so per year in the latter 1990s. The latest quarter for which I have info, Q4 2000, shows productivity increasing at an annualized rate of 2.2%. Perhaps Mr. Greenspan or some other wizard would like to show me the financial equations showing just how a 2.2% to 3% annual increase in worker productivity justifies stock market returns of 20% or more per year over a four-year period, or justifies such a huge increase in broad money supply along with a surge in corporate and personal debt. I really would like to see the relevant financial equations. I must have missed something in graduate business school.

Back to the Q1 GDP number. You have to remember that many retailers had huge sales in January to reduce inventories; much of that is reflected in the current GDP number. Also, car sales picked up in the first quarter, thanks to lower interest rates; but many analysts think that won't be sustained. Ditto for the housing market and mortgage refinancing boom (have you checked out how bloated and overextended the GSE's have become in the last year or two?); that has really been carrying the U.S. economy, but many analysts don't think that credit and real estate bubble can inflate much more. Home equity (i.e., how much people have actually paid their huge mortgages off) is at or near historic lows. Not a good sign. Even more troubling, the U.S. nongovernment debt (i.e., personal and corporate debt) mushroomed 65% over the past five years, which is unprecedented and breathtakingly stupid, especially as much of it went to finance an equity speculation bubble that John Kenneth Galbraith called "insane" (he also called Greenspan "theatrical"; "egomaniacal grandstander" would be my term) and has elicited severe warnings from the likes of Warren Buffett and George Soros. (The latter wrote a book in 1998 called "The Crisis of Global Capitalism," predicting the collapse of the increasingly speculative, volatile, and unethical global capitalist system; he has backed down on that prediction somewhat since then, but still see major trouble ahead. The analysis in his book was insightful, as one would expect from the man the "Wall Street Journal" called the most brilliant money manager of our era.) I note that in recent weeks even the normally obtuse U.S. financial press is starting to catch on to the huge U.S. personal and corporate debt burden. The British financial press, especially "The Economist" and the "The Financial Times," of course caught on to the huge U.S. credit and equity bubbles long ago. Last May, at a time when the dimwitted Greenspan was still hiking interest rates, London's Lombard Street Research firm predicted the Nasdaq would fall to 2000 by early 2001; the last LSR prediction I saw was for the Nasdaq eventually to fall to 1000 (which would still leave some tech stocks overvalued!). And even some U.S. equities research directors are wising up; one fellow the other night on PBS "Nightly Business Report" noted that yes, in the past a series of rate cuts have helped propel the stock market upward (the Fed has now cut more and faster than at any time since the vicious Reagan Recession of the early 1980s), but normally at such times the stock market has a reasonable average P/E ratio of 12 or so. The current P/E ratio for the S&P 500 is 26, he noted, so it's hard to see how even massive rate cuts can cause the market to surge much (though I would never discount the stupidity of the American investor).

Americans continue to spend more than they earn; personal debt as a percentage of disposal (after tax) income went from 105% to 107% during Q1, and the savings rate went from a negative $54 billion to a negative $74 billion during that quarter--to fuel a questionable 2% GDP growth rate (annualized), remember. Uh, does anybody see a problem here? Meanwhile, corporate earnings for the S&P 500 actually fell 8.5% for Q1 (quarter over quarter, i.e., as compared to Q1 2000), according to Thomson Financial/First Call. For many tech stocks, the earnings drop was much worse: 30% or more. And GM saw its earnings fall 88%. (Granted, Q1 2000 had been a standout quarter for the U.S. auto industry.) Even the supposedly immune service sector had trouble; latest PMI number for the service economy was 50.3 (again, anything under 50 signals contraction).

Then you can look at the Japanese mess, the weakening yen, and the threat of another regional currency devaluation debacle and financial crisis, which would impact us significantly. Merrill Lynch projects that the yen will fall to 142 to the U.S. dollar by September.

Yeah, we have a "rosy" economic scenario, we do.

-- Don Florence (dflorence@zianet.com), April 28, 2001.