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Economy in Brief

U.S. 1Q'08 GDP Revised Up Slightly, Profits Rose
by Tom Moeller May 29, 2008

U.S. real GDP growth during 1Q'08 was revised slightly higher to 0.9%, as expected. The rise followed a 4Q '07 increase of 0.6% and, together, the figures still are the weakest since near the end of the recession year of 2001.

Corporate profits are estimated to have risen at a 1.3% (1.7% y/y) annual rate after declining at a 12.4% rate in 4Q and at a 4.9% rate in 3Q. Earnings in the financial sector continued lower at a 2.9% (-12.2% y/y) rate following declines of 48.3% in 4Q and -22.7% in 3Q. U.S. nonfinancial sector earnings rose all of 1.7% (-2.6% y/y) but that gain also followed two quarters of sharp declines. The gain in foreign sector earnings slowed considerably to a 5.1% (34.9% y/y) rate after outsized increases during each of the prior five quarters.

In the GDP accounts, revisions to trade and inventories offset one another in their effect on 1Q GDP growth. An improved foreign trade deficit added 0.8 percentage points to growth, up from the earlier estimate of a 0.2 percentage point addition, though growth in exports was lowered to 2.8% (8.8% y/y) from 5.5%. Imports are now estimated to have declined at a 2.6% rate (-0.6% y/y) instead of rising 2.5%.

Inventory accumulation is now estimated to have added 0.2 percentage points to 1Q GDP growth, down from the last reading of a 0.8 point addition.

Most of the 1Q weakness in final sales to domestic purchasers was preserved. They now are estimated to have ticked down at a 0.1% rate versus the last estimate of -0.4% growth. These figures are still the first sub-zero readings since the earlier recession in 1991.

The decline in residential construction was still quite severe. Activity declined at a little revised 25.5% (-20.9% y/y) rate which was about equal to the drops in 4Q and 3Q. These are the quickest rates of decline since the recession in 1981 and the 1Q drop reduced overall real GDP growth by 1.2 percentage points.

Business fixed investment also fell at 0.3% (+6.4% Y/Y) rate which was less than the 2.5% shortfall estimated earlier. It still was the first negative growth, however, since 4Q'06 and the largest negative reading since early 2004. Overall it reduced 1Q GDP growth by less than 0.1 percentage points. Investment in structures grew 1.1% (13.7% y/y) while equipment investment fell 0.9% +3.3% y/y).

Growth in real personal consumption was unrevised at 1.0% (1.9% y/y) growth which was its weakest since the recession year of 2001. Spending on autos & light trucks fell at a 13.5% (-4.9% y/y) rate while spending on furniture & other household equipment ticked up at a quite weak 0.6% (4.9% y/y) rate. Spending of clothing rose 1.7% (1.6% y/y) and spending on services rose 3.0% (2.7% y/y). Growth in real PCE added 0.7 percentage point to 1Q real GDP growth and that was its weakest contribution since the recession of 2001.

The GDP chain price index was unrevised at a 2.6% annual rate which was its fastest gain in three quarters. The PCE price index rose at a 3.5% rate (3.4% y/y) which was down slightly from the 3.9% rise in 4Q. Less food & energy consumer prices rose at a 2.1% rate which was stable with growth during the prior four years. The price index for business fixed investment rose at a 0.2% rate and residential investment prices fell at a 2.3% (-0.9% y/y) rate which was the fastest rate of decline since 1970 (still not a typo).

Chained 2000$, % AR 1Q '08 (Preliminary) 1Q '08 (Advance) 4Q '07 3Q '07 1Q Y/Y 2007 2006 2005
GDP 0.9 0.6 0.6 4.9 2.5 2.2 2.9 3.1
  Inventory Effect 0.2 0.8 -1.8 0.9 0.1 -0.3 0.1 -0.2
Final Sales 0.7 -0.2 2.4 4.0 2.7 2.5 2.8 3.3
Foreign Trade Effect 0.8 0.2 1.0 1.4 1.0 0.7 -0.1 -0.2
Domestic Final Demand -0.1 -0.4 1.3 2.5 1.4 1.8 2.7 3.3
Chained GDP Price Index 2.6 2.6 2.4 1.0 2.2 2.7 3.2 3.2
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