Fragile economy improves and tax rebates should spur consumers -- but not out of woods yet
WASHINGTON (AP) -- The fragile economy improved slightly at the beginning of the year and could grow a bit stronger in the current quarter as extra cash from tax rebates spurs people to buy more. Still, it's not out of danger yet.
The economy grew at a 1 percent annualized rate in the first quarter, helped in large part by stronger sales of U.S. products overseas, the Commerce Department reported Thursday.
That was a tad stronger than the government's previous estimate of 0.9 percent growth for the quarter. And, the new reading was better than the anemic 0.6 percent growth rate logged in the final three months of last year.
Nonetheless, the two quarters together marked the slowest growth in five years. The economy has been bruised by housing, credit and financial problems. That led consumers during the first quarter alone to boost their spending at the weakest pace since the 2001 recession.
However, the government's tax rebates, the centerpiece of a $168 billion stimulus package, have helped to energize consumer spending in recent months, which should bolster the overall economy's performance in the April-to-June quarter.
The Federal Reserve, which on Wednesday halted a nearly yearlong rate-cutting campaign because of concerns about inflation, specifically credited "some firming in household spending" with a role in keeping the economy expanding.
As the stimulative effects of the tax rebates fades, though, some analysts worry that the economy could hit another rough patch.
"The economy is far from out of the woods," said Nigel Gault, chief U.S. economist at Global Insight. He predicted second- and third-quarter economic growth would benefit from the tax rebates but he believes there will be a "relapse" in the final quarter of this year as the effect of the rebates wanes.
On Wall Street, stocks tumbled as record-high oil prices and warnings of trouble in the key financial, automotive and high-tech industries rattled investors. The Dow Jones industrials plunged 358.41 points to 11,453.42 -- its lowest finish since Sept. 11, 2006.
Other reports issued Thursday showed weak spots in the economy.
New applications filed for unemployment insurance held steady at a high level of 384,000, the Labor Department said. The number of people continuing to draw unemployment benefits climbed to 3.1 million, the most in more than four years. Employers have cut jobs each month so far this year as they cope with fallout from high energy prices, the housing slump and harder-to-get credit.
The National Association of Realtors, meanwhile, reported that sales of previously owned homes rose in May, although prices continued to drop. Sales went up 2 percent to a pace of 4.99 million units. The median sales price, however, fell to $208,600, down 6.3 percent from a year ago. That was the fifth biggest year-over-year price decline in records that go back to 1999. Many analysts think housing prices need to stop falling or start rising for the ailing housing market to get back its health.
Fallout from the housing crisis continued to be a big drag on first-quarter growth: builders slashed spending on housing projects by 24.6 percent on an annualized basis. That wasn't as bad, though, as the 25.2 percent cut made in the fourth quarter, the most in 26 years.
For now the second quarter is shaping up much better than earlier estimates of little, if any, growth for the period. At one point, some thought the economy might contract. Some second-quarter projections now range from more than 1 percent to just shy of 2 percent.
That still would be considered sluggish. More normal activity would be along the lines of a 2.5 percent to 3 percent pace.
The Fed may be able to leave interest rates where they are for a while so that the economy can gain traction. However, some believe the Fed might be forced to boost rates later this year to fend off inflation.
Others think the Fed won't start to push up rates until next year. Either way, the next move on rates is likely to be up, not down, analysts said. The timing will hinge on how energy and food prices and other inflation barometers behave in the months ahead.
Oil prices zoomed Thursday -- passing $140 a barrel and then retreating a bit to close at a record $139.64 a barrel.
An inflation measure linked to the gross domestic product report showed "core" prices, which strip out food and energy costs, increased at a rate of 2.3 percent in the first quarter. That's up from a previous estimate and outside the Fed's comfort zone.
There's been a lot of talk about whether the country has fallen into a recession. The new GDP statistics did not meet what analysts consider one definition of a recession -- two straight quarters of shrinking economic activity. But that didn't happen in the last recession in 2001, either. And other barometers -- nationwide job losses and shriveling paychecks -- have pointed to a possible downturn. Such a determination is made by an academic panel, usually well after the fact.
"The first half will be more difficult than the second half," Commerce Secretary Carlos Gutierrez told The Associated Press. Although "the predictions were so dire," the first quarter's performance shows "how resilient our economy is by being able to show growth in the face of challenges."
The Fed hopes its powerful series of rate reductions and the government's stimulus will lift the country out of the doldrums over time.
"By the first half of next year we look for the underlying health of the economy to finally improve," said Stephen Stanley, chief economist at RBS Greenwich Capital. "But for the balance of this year, it looks like the economy is trapped in a subpar growth pace but not a recession -- economic limbo."