News > Economy
1Q U.S. GDP revised down
May 25, 2001: 11:51 a.m. ET

Durable goods orders, home sales also weak, but inventories shrinking
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NEW YORK (CNNfn) - The U.S. economy grew at a slower pace in the first quarter than previously thought while orders for durable goods plunged in April, the government reported Friday, indicating lingering weakness in the world's largest economy.

The Commerce Department said gross domestic product (GDP) -- the broadest measure of the nation's economy -- grew at a 1.3 percent annual rate in the quarter, versus a 1 percent rate in last year's fourth quarter. Economists surveyed by expected a 1.4 percent growth rate.

Meanwhile, the department said orders for cars, computers and other durable goods fell 5 percent in April after rising a revised 2.2 percent in March. Wall Street economists had forecast a much smaller 2 percent decrease.

Adding to the gloomy picture, existing home sales fell 4.2 percent to an annual rate of about 5.2 million last month, the National Association of Realtors (NAR) reported, about in line with forecasts.

"If housing is starting to weaken and manufacturing is not turning around, obviously it spells trouble for the economy," said Anthony Chan, chief economist with Banc One Investment Advisors.

"But it's not falling off a cliff," Chan added, his partial optimism reflecting the fact that a large part of the GDP revision was due to inventory reduction, which could be positive for growth going forward.

On Wall Street, stocks fell in early trading in what was expected to be a quiet session ahead of the three-day Memorial Day weekend.

U.S. Treasury bond prices also fell as traders digested remarks by Federal Reserve Chairman Alan Greenspan indicating the Fed may be near the end of its interest-rate-cutting campaign.

Inventory reduction a bright spot

In its initial estimate last month, the government said GDP grew at a 2 percent rate in the first quarter this year. The GDP estimates released Friday are based on more complete data than were available for the advance estimates issued last month, the government said.

The gloomier assessment of growth stemmed largely from updated figures on business inventories and consumer spending.

Companies, facing a glut of unsold goods on their shelves and in their warehouses, slashed 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.

"This is telling us that, moving forward, we may have bitten the bullet on the inventory overhang situation," Chan said.

As bloated inventories are brought into line with sales, production of goods can rise again.

"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.

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.

Consumer spending, which makes up two-thirds of economic activity, was revised downward somewhat in the latest report, to a 2.9 percent annual growth rate from the previously reported 3.1 percent.

Still, the University of Michigan's final May reading of consumers' attitudes about the economy rose to 92.0 from 88.4 in April, Reuters reported. Economists had been expecting a reading of 92.5. The number fell slightly from the preliminary reading released mid-month, which was 92.6.

More rate cuts on the way?

U.S. economic growth has slowed markedly since the middle of last year, when the Federal Reserve was raising interest rates in an effort to keep the rampaging economy under control.

Since the beginning of the year, the Fed has reversed course and cut rates by 2.5 percentage points in an effort to start the economy up again. Friday's report may mean more rate cuts are on the way.

"The outlook for the second quarter is a bit worrisome because a lot of the strength in the first quarter occurred early in the quarter and largely faded by the end of the period," said Steven Wood, economist with FinancialOxygen. "The prospects for subpar growth for another quarter will induce the (Fed) to ease (interest rates) further."

Fed Chairman Greenspan, speaking before the Economic Club of New York Thursday night, indicated the Fed likely will cut more, but the bulk of its work might be done.

"This period of sub-par economic growth is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated, requiring further policy response," Greenspan said. "We also need to be aware that our front-loaded policy actions this year should be providing substantial support for a strengthening of economic activity later this year," he added.

Home sales have been one of the few bright spots in the economic picture, as low mortgage rates have encouraged consumers to buy. But job cuts have mounted and mortgage rates have held steady in recent months, weakening the housing market.

The bad news about existing home sales comes just a day after the government said sales of new homes posted their biggest decline in four years in April.

"This report raises some concern among us about housing activity and that it may have topped out in March," David Luray, chief economist for NAR, told a news conference. graphic

-- from staff and wire reports


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