Economic Growth Revised Higher

MBA (5/30/2008 ) Velz, Orawin
Economic growth was slightly stronger than initially reported, according to the Bureau of Economic Analysis’ preliminary estimate. Real (inflation-adjusted) gross domestic product (GDP) grew 0.9 percent in the first quarter of this year, an upward revision from 0.6 percent reported in the advance estimate. (Unless otherwise noted, data reported here are seasonally-adjusted annualized rates.)
The overall upward revision to growth was the result of several factors. Downward revision to imports, upward revision to investment in nonresidential structures and upward revision to consumer spending on nondurable goods all increased GDP. These impacts outweighed downward revisions to inventory investment, exports, consumer spending on services and government spending, all of which reduced GDP.

The housing market represented the biggest drag to growth, subtracting 1.2 percentage points from real GDP growth. Real residential investment declined 25.5 percent in the first quarter, improving from a previously estimated 26.7 percent drop, but still the biggest quarterly drop since the fourth quarter of 1981. Housing has been a drag on growth for nine consecutive quarters, the longest downturn since the series began in 1947.

The trade sector has been a positive influence on economic growth over the past year. It was the biggest boost to growth in the first quarter, adding 0.8 percentage points, significantly more than the 0.2 percentage points previously reported.

Inventories declined in the first quarter instead of the increase reported in the advance estimate. While the downward revision reduced GDP, it was nonetheless positive for the current quarter economic growth. An unintended increase in inventories bodes ill for future economic growth as businesses will likely pare down production to reduce unwanted stockpiles. The drop in inventories in the first quarter suggested that businesses will have to increase production if demand picks up in the current quarter.

The report also included a first look at corporate profits for the quarter. Earnings adjusted for the value of inventories and the depreciation of capital expenditures (or profits from current production) increased 0.3 percent to an annual rate of $1.57 trillion. Most of the gain came from overseas, where it was helped by global economic growth and the weak dollar. Domestic profits increased only modestly, with higher profits from nonfinancial businesses slightly outweighing losses in financial services.

Long-term interest rates continued to rise. The yield on 10-year Treasury rose eight basis points and stayed around 4.08 percent on Thursday afternoon, the highest rate since the end of December.