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Trade gap hurt US economic growth { June 1 2007 } Original Source Link: (May no longer be active)
http://www.iht.com/articles/2007/06/01/business/econ.phphttp://www.iht.com/articles/2007/06/01/business/econ.php
Trade gap and slow output hurt U.S. economic growth
By Jeremy W. Peters
Friday, June 1, 2007
NEW YORK: The U.S. economy stalled over the winter.
The Commerce Department said Thursday that it had revised the broadest indicator of economic strength, measuring all goods and services produced in the United States, to show a 0.6 percent advance - less than half the 1.3 percent reported in its first estimate last month.
The major culprits were the trade deficit, which swelled even more than first estimated, and slower business production. Those problems added to the strain on the economy from the weak housing market and held down growth to the slowest pace recorded since the end of 2002.
But most economists agree that the economy probably bottomed out in the first three months of the year, and they have forecast a rebound as some of the economic forces that subtracted from growth in the first quarter reverse.
Trade is one of those forces. While the revised gross domestic product figures showed that imports rose faster than first estimated, slower consumer spending should soon dampen the influx of foreign goods, economists said.
At the same time, demand for American goods and services in Asia and Europe is growing - and getting an added boost because of a weaker dollar.
"It doesn't seem realistic that our exports will be dead in the water," said Ken Mayland, president of ClearView Economics. "And in the context of an even cheaper dollar, they're even more competitive now."
Business production is poised to pick back up not only as foreign countries buy more and more American goods and services but also as American businesses start replenishing their inventory stockpiles.
Inventories declined in value by $4.5 billion in the first quarter after growing by $43.2 billion last year. (The government first estimated that inventories increased by $14.8 billion.) The paring of inventories took nearly a percentage point off growth in the first quarter, but economists expect that will reverse.
"Now it will actually be adding to the economy because we'll probably start seeing some modest rebuilding in inventories," said Lynn Reaser, an economist with Bank of America. "Over all, it looks like the first quarter will turn out to be the low point in this cycle."
How much the economy will rebound depends largely on what happens to consumer spending. While the new Commerce Department report showed that consumers actually spent at a faster clip than first measured - a 4.4 percent increase instead of the 3.8 percent reported in April - many economists do not expect that to hold up.
For all the figures that were revised in the GDP report, one major economic indicator stayed the same. The Federal Reserve's preferred measure of inflation, a calculation of prices excluding food and energy, rose 2.2 percent - a few notches above what central bankers consider acceptable.
Recently, wage increases have not been keeping pace with inflation. At the same time, gasoline prices have been climbing, and the housing market slump in much of the country is sapping homeowner equity. A result, economists say, is that consumers have been less free to spend their shrinking disposable income.
And if businesses start slowing their hiring, as many economists have predicted, the economy will not have the job market to help prop it up. "Job and income growth is going to slow," said Richard Moody, chief economist with Mission Residential, a real estate investment firm in Austin, Texas. "For consumers to spend even close to what they were spending in the first quarter, that would mean they'd have to substitute mortgage equity debt for credit card debt, and I don't see that happening."
A new Labor Department report released Thursday showed that for now, the job market appears to be holding firm. The four-week moving average of Americans filing state unemployment claims for the first time fell to 304,500, the lowest level in more than a year. Initial jobless claims dropped by 4,000, to 310,000, in the week that ended May 26. And on Friday, the Labor Department will report job growth and unemployment statistics for May.
While there is doubt about the strength of the job market, there is no question that the housing market remains in the doldrums. A separate Commerce report on Thursday said that construction spending rose 0.1 percent in April after a 0.6 percent gain in March.
At the same time, spending on residential construction fell again. In the GDP report, however, the housing market looked a little better. It subtracted a little less from growth than first calculated - 0.87 percentage point from overall GDP growth instead of the initial estimate of 0.98 percent.
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