Washington: A buildup in inventories kept the US economy afloat in the first quarter despite the weakest consumer spending since 2001 and reduced business investment, a government report on Wednesday showed.
Gross domestic product grew at a 0.6% annual rate in the first quarter, the Commerce Department said. That matched the fourth quarter’s advance and topped forecasts for 0.2% growth, but it did not end the debate on whether the country was sliding into recession.
Some economists said the report suggested the US economy was on a bit firmer ground than had been thought, but others braced for worse times ahead as businesses ratchet back production further to try to sell off inventories.
“There are some very troubling signs in this report,” said economist Paul Ashworth of Capital Economics Ltd in London. “The GDP figure is being flattered by the strength of demand abroad and an involuntary inventory accumulation.”
Nonetheless, stock prices were up solidly at midday, buoyed by hopes that employment will hold up. ADP Employer Services said it found private-sector companies added 10,000 jobs in April, a sharp contrast to forecasts that they would cut jobs.
The government is set to issue its report on April employment this Friday and forecasts are that 80,000 more jobs will be cut. Jobs were lost in each of the first three months this year.
Housing still weighs
The economy is burdened by a crisis-stricken housing sector in which prices are declining, sapping consumer optimism and heightening concern that spending will shrivel in coming months and raise risks of a recession.
The GDP report showed that final sales to domestic purchasers weakened in the first three months this year at the steepest rate in 16 years, which raises odds that bloated inventories will stay on the shelves.
“We expect that the coming inventory correction will send growth into negative territory, save a truly heroic effort by the US consumer to spend their way out of the current malaise with their $600 rebates,” said Joseph Brusuelas, U.S. chief economist at IDEAglobal in New York.
Tax rebates that are part of a government economic stimulus program began to flow this week to upwards of 100 million Americans.
The mixed reports came just before Federal Reserve policy-makers began a second day of deliberations that is expected to produce a decision to trim interest rates another quarter percentage point to try to keep expansion going.
Analysts said they still expected a rate reduction.
“This is not going to disrupt things at the Fed today,” said economist Pierre Ellis of Decision Economics in New York.
GDP is the broadest measure of total economic activity within U.S. borders. Many of the first-quarter report’s details implied weakening that analysts fear will lead to a recession.
The GDP figures are an initial measure of first-quarter performance and will be revised twice in coming months.
The Fed has cut its benchmark federal funds rate by 3.25 percentage points since mid-September to shore up the economy and calm unsettled financial markets. But many believe the Fed may send a signal at Wednesday’s meeting that its rate-cutting campaign is at an end amid signs of persistent rises in food and energy prices.
Consumers under stress
Consumer spending that fuels two-thirds of economic activity through consumption of goods and services, grew at the weakest rate since the second quarter of 2001, when the economy was last in recession. It rose at a 1% rate after growing 2.3% in the fourth quarter.
The weakening in an already distressed housing sector was even more striking. Spending on residential construction plunged at a 26.7% rate - a ninth straight quarterly decline and the biggest for any three months since the end of 1981.
A buildup in business inventories, which bolsters growth in the period in which it occurs, helped the economy keep growing in the first quarter. Stocks of unsold goods rose at a $1.8-billion annual rate in the first quarter after shrinking at an $18.3-billion rate in the final quarter of last year.
There was a slight moderation in the rate of price rises. Personal consumption expenditures excluding food and energy items - a key gauge of core inflation that is favored by the Fed - rose at a 2.2% rate after increasing 2.5% in the fourth quarter.
A separate report suggested the weakening labor market was keeping labor costs under wraps. The Labor Department said U.S. employment costs grew at a 0.7% annual rate in the first quarter, marking a slight slowdown from the fourth quarter.
Figures from the Mortgage Bankers Association on Wednesday suggested the housing market was far from recovery.