Is more less-bad data on the economy enough to signal an end of the recession? The bright spots or “green shoots” are promising signs that economic recovery is near, but there are also many negative signs, like lackluster consumer spending, that can inhibit improvement. Don Miller from Money Morning reports on the latest good and bad data from the economy.
The U.S. economic slump continued in the first quarter, but showed signs of moderating as gross domestic product (GDP) figures were revised upward from previous estimates by the Commerce Department on Friday.
Still, U.S. GDP, which measures the value of total goods and services produced, shrank at a 5.7% annual pace, the worst performance in 50 years, as the consumer, inventory and business investment sectors all turned in lackluster results.
The revised figure was less than the 6.1% the government estimated last month, and slightly better than the fourth quarter, when GDP contracted at a 6.3% annual rate.
Even though the numbers were worse than most economists had forecast, they spurred optimism among some analysts.
“The recession is easing. The second quarter is shaping up to be a smaller decline of about 3% to 3.5%. It should be the last of the negative quarters,” Christopher Low, chief economist at FTN Financial in New York told Reuters.
A poll of 75 economists by Bloomberg News had forecast a drop of 5.5%.
However, a deeper look at the numbers reveals that a key economic component, consumer spending, increased by 1.5%, less than the previous government estimate of 2.2%. That followed a collapse in the fourth quarter of 2008, when it fell at a 4.3% annual rate.
If the current economic crisis continues to spur consumers to increase their savings and pull back from taking on more debt, it could choke off any nascent economic recovery because consumer spending accounts for about 70% of U.S. economic activity.
Economists fear that spending may plunge again this quarter as unemployment continues to surge. Americans have lost over 5 million jobs since the recession began in December 2007, and some economists are predicting unemployment could rise from April’s 8.9% to over 10% by the end of the year.
The imminent bankruptcy of General Motors Corp. (NYSE: GM) and the currently active bankruptcy at Chrysler LLC, both loom large over the unemployment figures as both companies are expected to idle more factories and layoff additional workers over the summer months.
Another key economic indicator turned mixed as the Commerce Department said businesses reduced stockpiles by $91.4 billion in the first quarter, the biggest cut on record, but smaller than $103.7 billion estimated last month. Excluding the reduction in inventories, the economy would only have contracted at a 3.4% pace.
Reduced inventories increase the odds for economic growth in the second half of the year, as businesses must replenish goods that have been depleted, increasing investment and forcing them to hire more workers.
“We still have more to go, but lean inventory positions can be a strong source of leverage for the economy once demand stabilizes and starts to grow again,” Russell Price, a senior economist at Ameriprise Advisor Services in Detroit, told Bloomberg News before the report was issued.
Other analysts warn that while the recession may be officially over, the recovery is likely to be long and painfully slow.
“When you remove the government stimulus, what the private sector can generate in terms of growth feels like a recession,” Jeffrey Rosenberg, head of global credit strategy at Bank of America Securities Merrill Lynch in New York, told Reuters.
Rosenberg thinks the Obama administration has painted an overly optimistic economic picture in its latest budget projections, which predict economic growth hitting 3.2% next year and 4.6% by 2012.
In his eyes, the U.S. economy may struggle to achieve even paltry growth in the range of 0.5% to 1.5%, as banks recover from the credit crisis, which could take another three years.
“If that’s what you’re able to generate, that economy is not generating the job growth required to bring the unemployment rate down,” Rosenberg said.
This article has been reposted from Money Morning. You can view the article on Money Morning’s investment news website here.