Economy grows faster than first believed

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NEW YORK (CNNMoney.com) -- U.S. economic growth was slightly better than previously reported for the first quarter, primarily because a weakened dollar reduced imports, according to a revised reading on gross domestic product announced Thursday.

GDP, the broadest measure of the nation's economic activity, stood at an annual rate of 0.9% in the first quarter, adjusted for inflation, the Commerce Department said. That matched the consensus prediction of economists surveyed by Briefing.com.

"Nine-tenths of a percent is not strong on its own right, but if the second quarter does not show decline, it's very unlikely we'll have a recession in 2008," said Wachovia economist Mark Vitner.

The results surpassed the initial estimate released in late April, a 0.6% rate that matched the anemic growth in the fourth quarter.

According to Vitner, the National Bureau of Economic Research (NBER), which determines whether or not the U.S. economy entered a recession, will not vote to label the current sputtering economy "recessionary" if there is no decline in GDP. The most common definition of a recession is two consecutive quarters in which GDP is negative, although the official designation of an economic downturn is based on broader measures as determined by the NBER.

The fourth quarter of 2007, though weak, still showed the economy grew 0.6%.

The increase from the initial estimate was mainly due to March's U.S. trade gap reading, which was not available until after the advanced GDP numbers were reported. Though slightly weakened demand for U.S. exports subtracted about three-tenths of a percentage point from the initial first-quarter GDP reading, a substantial decline in imports added nine-tenths of a percentage point.

The weakened dollar led to the sharpest decline in Americans' demand for foreign imports in more than six years, according to a Commerce Department report released earlier this month.

"The economy is more fragile than the GDP numbers indicate," said Vitner. "Fewer imports can boost GDP, but they can also make the economy weaker."

Vitner said trucking shipments and retail sales are down nationally as a result of the weak import numbers.

But the decline in imports also meant lower inventory levels for retailers, which account for more than half of all GDP. Changes in non-farm inventories added nearly four-tenths of a percentage point to overall growth, down from nine-tenths of a percentage point in the previous report.

"Inventories showed a decline in the first quarter, but that will make it easier for the second quarter to have a modest growth," said Vitner, who believes GDP will grow 1% in the current quarter.

Vitner suggested that the increase in inventory liquidations represents a sign that businesses will pick up production in the first quarter in order to replenish those inventories.

The GDP price index, the so-called "price deflator," which measures prices overall, rose at a 3.5% annual rate, which was unchanged from the initial estimate.

The core PCE deflator - a more closely watched inflation reading that measures prices that individuals pay excluding volatile food and energy prices - rose 2.2%, which was also the same as reported in the first GDP report.

That means inflation is still above the perceived comfort zone of central bankers. The Federal Reserve is generally believed to want to see the 12-month change in core inflation readings remain between 1% and 2%.

The Commerce Department issues three readings on GDP: "advanced," "preliminary," and then "final." Thursday's report is the middle of the three, and the final reading will be released June 26.