U.S. Economy Expanded at a 0.6% Annual Rate in First Quarter (Bloomberg)

By Shobhana Chandra

May 31 (Bloomberg) -- The U.S. economy grew last quarter at a 0.6 percent annual rate, the weakest in more than four years, as housing slumped, the trade deficit widened and businesses reduced inventories.

The gain in gross domestic product is the weakest since the last three months of 2002 and compares with a 1.3 percent pace initially estimated last month, according to revised figures from the Commerce Department today in Washington. Last quarter may prove to be the low point for the economy as recent reports showed business spending improved and leaner stockpiles prompted factories to boost production, economists said. Such an outcome would bear out forecasts by Federal Reserve policy makers, who this month reiterated that growth will pickup for the rest of this year and into next.

``We're looking for a gradual firming in growth,'' Michael Feroli, an economist at JPMorgan Chase & Co. in New York, said before the report. ``The inventory situation is a lot more favorable, and the drag from housing will be reduced.'' Today's report is the second of three estimates released by the government for the quarter. The figures will be revised again next month. Economists forecast a 0.8 percent gain for GDP last quarter, according to the median of 78 estimates in a Bloomberg News survey. Forecasts ranged from 0.1 percent to 1.8 percent. The world's largest economy grew at a 2.5 percent annual pace in the fourth quarter.

The Fed's preferred inflation measure, which is tied to consumer spending and strips out food and energy costs, rose at a 2.2 percent annual rate, the same as previously estimated.

Comfort Zone

Fed Chairman Ben S. Bernanke is among policy makers that have said a 1 percent to 2 percent range is preferable. In minutes of the central bank's May 9 meeting released yesterday, Fed officials continued to view inflation as the biggest risk to the economy. Today's revisions reflected a bigger trade deficit and fewer inventories than the government estimated last month. The trade deficit widened to an annual pace of $611.8 billion, subtracting 1 percentage point from GDP, twice as much as previously estimated. Companies reduced stockpiles at a $4.5 billion rate last quarter compared with initial estimates of a $14.8 billion gain at an annual rate. The figures subtracted another percentage point from growth. A jump in consumer spending last quarter was one of the few things that kept the expansion alive. The increase in spending, which accounts for about 70 percent of the economy, was revised up to an annual rate of 4.4 percent, the biggest gain in a year, from an initial estimate of 3.8 percent.

Recipe For Growth

``Stronger growth in domestic final demand combined with a bigger inventory correction is a recipe for faster growth in the second quarter,'' Brian Bethune, an economist at Global Insight Inc. in Lexington, Massachusetts, said before the report. Spending gains may slow as record gasoline prices and falling home values pinch consumers, economists said.

A rebound in business investment is contributing to a more optimistic outlook for the second quarter even as consumer spending moderates, economists said. Orders for durable goods recorded a third straight gain last month, the longest streak in almost two years. ``Second-quarter economic activity is firming up after the soggy debut for the year,'' Lynn Reaser, chief economist of the Investment Strategies Group at Bank of America in Boston, said before the report. ``The industrial sector is again on the mend.'' Housing was less of a drag last quarter than previously projected, subtracting 0.9 percentage point from growth, compared with the initial estimate of 1 percentage point. Home construction fell at an annual rate of 15.4 percent last quarter, after contracting by 19.8 percent in the previous three months.

Builders Pessimistic

``The homebuilding environment remains difficult,'' Richard Dugas, chief executive officer of Pulte Homes Inc., said in a statement this week. Pulte, the third-largest U.S. homebuilder, plans to fire 16 percent of its staff after it reported a first- quarter loss. Rising foreclosures and mortgage defaults by borrowers with poor or limited credit history are adding to concerns the housing recovery may take longer, economists said. In minutes of their May 9 meeting, Fed officials acknowledged they underestimated the length of the housing recession. Still, they said the risks from the fallout of the subprime lending crisis and the previous slump in business investment ``were judged to have diminished slightly.'' Growth will accelerate to an annual pace of 2.2 percent this quarter, based on the median estimate of economists surveyed earlier this month by Bloomberg News.

Growth Forecasts

Some have boosted their forecasts since then. Economists at Morgan Stanley project the economy will expand at a 3.1 percent pace, up from their previous estimate of 2.4 percent. UBS Securities LLC boosted their growth estimate to 2.3 percent from 1.8 percent. Today's GDP report included a first look at corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, rose 1.2 percent to an annual rate of $1.67 trillion. For all of last year, profits were up 21 percent. The government also issued updated income figures for the previous two quarters. Personal income was revised up by $31 billion for the fourth quarter of 2006, boosting the gain over the previous quarter to an annual rate of 5.9 percent from 4.7 percent. The increase suggests either payrolls have been undercounted or employees were paid more than previously estimated, economists said.