Thursday, May 31, 2007

Measly GDP a good sign? 

The U.S. economy grew last quarter at the slowest pace in more than four years, a 0.6 percent annual rate that may prove to have been the low point of the expansion.

The gain in gross domestic product, announced by the Commerce Department today in Washington, was lower than the 0.8 percent rate economists had forecast, and less than the government's previous 1.3 percent estimate. A private report from Chicago today showed a jump in business activity, while figures since the end of March show a rebound in corporate spending and consumer confidence.

Traders further reduced bets that Federal Reserve Chairman Ben S. Bernanke will need to cut interest rates this year. The prospect of a recession, given a one-in-three chance by former Fed Chairman Alan Greenspan, looks less likely as business investment and manufacturing strengthen.

The reports "signify a clearing of the decks for a better performance going forward,'' said Carl Tannenbaum, chief economist at LaSalle Bank in Chicago and president of the National Association for Business Economics.

So why would a weak report do this? Because of the nature of the revision.

The preliminary estimate of the first-quarter increase in real GDP is 0.7 percentage point, or $17.4 billion, lower than the advance estimate issued last month. The downward revision to the percent change in real GDP primarily reflected a downward revision to private inventory investment and an upward revision to imports that were partly offset by an upward revision to personal consumption expenditures.
Businesses offloading inventories while consumers are spending more is likely to lead to more economic activity going forward. Indeed, it may already be happening. So far, those concerned about the end of the "home ATM" have yet to be proven right, but it's still early.