So officially it is not quite a negative downturn, just a slow down. Gross domestic product (GDP)measures the value of all goods and services produced within the United States and is considered the best overall measure of the country’s economic health. Many analysts were predicting that the GDP would weaken a bit more — to a pace of just 0.5% — in the first quarter. Earlier this year, some economists thought the economy would actually lurch into reverse during the opening quarter. Now, they say they believe that will likely happen during the current April-to-June period.
The housing situation turned more bleak in the first quarter, as record-high foreclosures dumped more unsold homes on the market, adding to builders’ headaches. Builders slashed spending on housing projects by a whopping 26.7%, on an annualized basis, the most in 27 years. That was the big drag on the economy.
Consumers — whose spending is vital to the country’s economic health — turned much more cautious, also restraining overall economic growth in the first quarter. Their spending rose at just a 1.0% pace. That was down from a 2.3% growth rate and was the slowest since the second quarter of 2001, when the United States was suffering through its last recession.
Soaring energy and food prices are walloping people’s pocketbooks, leaving them with less to spend on other things. The credit crunch also has made it harder for people to finance big ticket items, such as cars and homes. And, many homeowners — watching their homes — often their single-biggest asset — slump in value, also are feeling less wealthy and less inclined to spend.
Another report from the Labor Department today showed that workers’ compensation — including wages and benefits — grew 0.7% in the first quarter, the slowest pace in two years. Many economists were expecting a 0.8% rise. The report suggests that the weak labor market is making employers a bit less generous with their compensation.
Businesses, meanwhile, cut back spending on equipment and software at a 0.7 percent pace, the most since the final quarter of 2006. And, they trimmed spending on commercial construction at a 6.2% pace, the most since the third quarter of 2005. However, businesses boosted their investment in building up stocks of supplies in the first quarter, a big force adding to GDP. That means they are sitting on inventories so any further buying is unlikely. Exports of US goods and services also helped first-quarter growth.
U.S. exports are being helped by the falling value of the US dollar, which makes US made goods and services less expensive to foreign buyers. The USD actually rose to a new-multi week high against the euro and raced higher versus the sterling Tuesday morning in New York. The dollar jumped to its highest in nearly 4-weeks versus the euro, rising a penny to 1.5539, down from 1.6011 a week ago.
Spending by the government was another factor lifted GDP. Governmnet spending rose at a 2% pace for the second quarter in a row.