Economy growing ... but just barely
GDP rose at a 0.6 percent pace in the first quarter, the US government reports.
America avoided a period of outright decline in national output as 2008 began, revealing an economy that is not so much buckling as slowly sagging.
For practical purposes, positive growth numbers released Wednesday are just a technicality. It feels like a recession to American workers, consumers, and businesses. A period of significant weakness could persist for months to come, perhaps well into 2009.
What's equally notable, however, is that this downturn is unfurling slowly and in a muted fashion, despite the shocks of soaring energy and food costs and a plunge in real estate wealth.
Some economists even raise the possibility of something unprecedented in records since World War II: that economic officials will declare a recession even as gross domestic product continues to rise.
In the first three months of the year, US economic output rose at a 0.6 percent annual pace, the Commerce Department reported Wednesday. Jobs, wages, and consumer spending are weakening, but only slowly.
In the current economic cycle, much of the direct impact of a consumer slowdown is being felt overseas, rather than in the domestic economy.
"In some sense the recession has been outsourced," as people postpone purchases of BMW cars and Korean flat-screen TVs while still paying for rent or child care, says Mark Vitner, an economist at Wachovia Corp., a banking firm in Charlotte, N.C. "If you look at the composition of these numbers ... it really begs the question of whether we're going to see a decline [of GDP] at all in 2008."
For a couple of years now, America's hunger for imported goods has been cooling – generally rising but at a decelerating pace. In some recent quarters, the pace of imports has actually fallen.
The way GDP is tallied, that actually helps boost economic output, because imports are a line item that subtracts from growth, while exports represent positive US production.
"The slowdown in imports is actually helping to produce stronger GDP," Mr. Vitner says. "But it's probably not producing an improved sense of well-being."
Foreign trade is supplying some positive momentum for GDP on the export side as well, as a weak dollar boosts foreign demand for US-made goods.
In addition, tax-rebate checks, which were mandated by Congress and President Bush to stimulate the economy, will soon begin to bolster consumers' bank accounts, economists note.
These may be modest positives, but for Vitner and some other economists, they raise the prospect that the economy could slide through the year without any quarters when GDP actually declines.
One rule-of-thumb definition of a recession is two quarters when growth turns negative. All recessions since at least the 1940s, for example, have seen some period of decline in the production of goods and services.
Some economists believe that this year will see such a decline. But they also add that, even without negative growth, a recession may exist based on other criteria such as jobs and income.
Recessions are officially declared by a committee of economists at the National Bureau of Economic Research, a private organization in Cambridge, Mass. The decision is generally announced after the fact, based on analysis of data on economic output, incomes, and job creation.
Job growth has been negative for several months. Wages, adjusted for inflation, have also been declining on a year-over-year basis. Broader measures of income appear to be stagnating. And GDP, while still positive, has been barely growing in the past couple of quarters.
"Whether it's formal [recession] or not may not be that important," Mr. Kretzmer says. "Our forecast leans toward a somewhat lengthy episode [of weakness], shallow but prolonged."
The good news is the "shallow." Unless severe shocks or policy mistakes cause large-scale unemployment, the economy generally plows along. Unemployment stands at 5.1 percent, pending a new report from the Labor Department on Friday.
"In our $14.2 trillion economy, it's very hard for us to see huge swings one way or the other," Vitner says. Consumer spending accounts for two-thirds of GDP, and "most of consumer spending is effectively on autopilot."
The bad news is the "prolonged." It will be hard for consumers or businesses to accelerate their spending much while they are being buffeted by forces such as the housing downturn and a surge in the prices of commodities such as oil, many economists say.
"We've become somewhat more negative on any quick recovery" in the housing market, Kretzmer says. "That makes it difficult for the economy to recover."
Some analysts say that Wednesday's preliminary tally of first-quarter economic activity was weaker than the overall GDP number suggests. Consumer spending rose, but at a tepid 1 percent pace, and spending on durable goods fell at a 6 percent annual rate, notes Michael Darda, chief economist at MKM Partners in Greenwich, Conn. He says the economy may enter a recession, based on payroll and income data, even if it does not see two quarters of negative growth.
At the same time, he is more optimistic than some forecasters about the strength of a recovery. He points to marketplace signals such as a stock market that has stabilized and risen a bit in recent weeks.
"These indicators suggest more robust growth later in 2008 or in early 2009," Mr. Darda wrote in a report Wednesday.