GDP Revised Down to 1.3 Percent
May 25 10:57am ET
By Jonathan Nicholson
WASHINGTON (Reuters) - U.S. economic growth in the first three months of the year was slower than previously thought as companies slashed their inventories at the fastest pace in 18 years, the Commerce Department said on Friday.
Commerce said gross domestic product, the broadest measure of economic activity, grew at a 1.3 percent annual rate in first quarter, up from the 1.0 percent clip seen in the final three months of 2000, but well below what many economists regard as the economy's potential. Previously, growth had been estimated at a 2.0 percent rate.
The figures were slightly weaker than Wall Street analysts had been expecting. Economists polled by Reuters had forecast growth to be revised down to a 1.5 annual rate.
The gloomier assessment of growth largely stemmed from updated figures on business inventories and consumer spending. Companies, facing a glut of unsold goods on their shelves and in their warehouses, cut inventories at an $18.9 billion annual rate, the first time since 1991 they had done so and the sharpest cutback since the first quarter of 1983.
After-tax corporate profits fell 3.1 percent in the quarter, after declining 4.3 percent in the previous quarter. That marked the first time since the third and fourth quarters of 1998 that profits had fallen for two straight quarters.
GOOD FOR GROWTH
While the change in inventories was a heavy drag on first quarter growth, it may a good sign for growth ahead. As bloated inventories are brought into line with sales, production of goods can ramp back up.
"The net is pretty much where we expected it to be. The inventory liquidation is still continuing at a rapid rate which is positive for growth," said Steve Richiutto, chief U.S. economist for ABN Amro.
"It makes it very difficult for us to have the technical definition of a recession," said Mark Vitner, an economist at First Union Capital Markets in Charlotte, N.C. A recession is usually defined as two consecutive quarters of shrinking economic output. Some analysts had thought the U.S. economy could have slipped into recession near the end of 2000, a contention that did not materialize in the data.
The Federal Reserve has cut interest rates five times this year in an effort to revive the flagging economy. While the central bank is widely expected to cut rates again at its next meeting in late June, policymakers are beginning to hint that the end of the current cycle of aggressive easings may be nearing its end.
Federal Reserve Governor Laurence Meyer said Thursday the Fed should be careful to avoid "overshooting in the other direction in a way that ends up adding to price pressures as growth strengthens."
Fed Chairman Alan Greenspan said the U.S. economy is still not out of the woods and that it remains at risk of weakening more than anticipated, but added the sharp interest rate cuts the Fed has already made this year should offer the economy "substantial" support by year-end.
The central bank sees price pressures as being largely contained and inflation measures in the GDP report were little changed from the initial estimates.
The price index for personal consumption expenditures, a number closely watched by the Fed, rose at a 3.2 percent annual rate, down slightly from the 3.3 percent pace seen in the advance report released last month but still the fastest pace since the first quarter of 2000. Excluding food and energy, the index was up 2.6 percent.
Consumer spending, which makes up two-thirds of economic activity, was revised downward somewhat in the latest report, to a 2.9 percent annual rate from the previously reported 3.1 percent rate.
Exports were also revised downward, falling by 2.7 percent instead of the originally reported 2.2 percent decline. |
