U.S. Data Show Dark Cloud Over Economy

By Jonathan Nicholson WASHINGTON (Reuters) - The U.S. economy largely worked through a backlog of unsold goods in the first three months of the year, but the latest reports on manufacturing and the housing market indicate the economy started off the second quarter on a weaker note.

The U.S. Commerce Department said Friday the economy grew at a 1.3 percent annual rate, down sharply from the originally reported 2.0 percent growth rate. In a silver lining to the report, though, business inventories were cut back at a sharp rate, easing the build-up on shelves and in warehouses.

But other reports showed the second quarter only hobbling out of the starting gate. Orders for so-called durable goods -- expensive manufactured items meant to last at least three years -- fell 5.0 percent in April, while sales of existing homes slumped 4.2 percent.

Those numbers, combined with a decline in employment of 223,000 in April reported several weeks ago, have raised the possibility that further weakness lies ahead for the economy.

"I think the second quarter is going to be weaker than the first quarter. We are likely to see a high-wire act between a recession and a soft landing," said Sung Won Sohn, chief economist with Wells Fargo & Co. in Minneapolis.

"It is very possible the second quarter could be as weak as, if not weaker than, the first quarter and we did not grow very quickly in the first quarter," said Joel Naroff, chief economist with Naroff Economic Advisors in Holland, Pennsylvania.

Stock markets were lower in mid-afternoon following a slew of economic data. The Dow Jones industrial average and the tech-heavy Nasdaq composite were off less than 1 percent.

A TALE OF TWO QUARTERS

The revised first-quarter growth number, while lower than expected, was a cause for cautious optimism upon its release. Much of the drag in the first quarter came from an aggressive slashing of inventories by businesses. Companies cut back inventories at an $18.9 billion annual rate, the first time they had pared them since 1991 and the sharpest reduction in stocks since 1983.

That means firms should have worked off enough excess inventories in the prior quarter to allow them to begin ramping production back up. The possibility of an inventory "overhang" has been one of the major worries for economic policymakers and Friday's data indicated such an overhang could be short-lived.

But the durable goods report, also released by Commerce, showed Corporate America is not yet ready to plunge headlong back into purchasing new plants and equipment.

The 5.0 percent decline was more than twice what had been expected by Wall Street analysts and was broad-based, with softness even seen in high-tech equipment such as computers and semiconductors.

"Today's news clearly shows that the pace of economic growth will continue to advance at a snail's pace in the second quarter as firms continue to work off inventories, which translates into reduced orders and economic output," said Jerry Jasinowski, president of the National Association of Manufacturers.

And while the housing market, aided by relatively low unemployment and falling mortgage loan rates, has been a pillar of strength in the economy this year, the home resales report, released by the National Association of Realtors, pointed to some softening as well. Both new and existing home sales help stimulate consumer spending, as buyers rush out to furnish their houses.

Home resales were down in all four regions, showing widespread weakness. But the decline was not as worrisome as the durable goods report, as it came after a high level of sales in March.

"This dip in April merely puts sales back onto a sustainable track," said Ian Shepherdson, chief U.S. economist with High Frequency Economics in Valhalla, New York .

FED ROLE DEPENDS ON DATA

Even as the orders and home resales reports raised questions about the economy's path in the current quarter, yet another release -- the index of consumer sentiment compiled by the University of Michigan -- sounded an upbeat note.

According to market sources, the index rose to 92.0 in May from 88.4 in April in its second and final reading of the month. That could mean that consumers were more confident and would boost spending ahead.

This would help Federal Reserve policymakers who, having dramatically cut interest rates five times this year so far, are beginning to hint that they may want to take a more cautious approach ahead.

In a speech Thursday night in New York, Fed Chairman Alan Greenspan said, "The period of sub-par economic growth is not yet over," but also warned that the central bank's previous easings "should be providing substantial support for a strengthening of economic activity later this year."

Rick Egelton, deputy chief economist at Harris Bank/Bank of Montreal in Toronto, said, however, that the latest data show it's likely too soon to worry that the Fed is set to call an end to its rate-cutting campaign.

"These (reports) certainly suggest we're not there yet," he said.

Copyright 2001 Reuters News Service.

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-- Martin Thompson (mthom1927@aol.com), May 25, 2001

Answers

If they think the second quarter reports will be bad, wait till they see the third quarter reports. The blackout slam on California this summer will throw third quarter earnings into a whirlpool sucking sound--all downward.

-- JackW (jpayne@webtv.net), May 26, 2001.