- The Washington Times - Thursday, May 31, 2007

Economic growth nearly ground to a halt this past winter, posting a 0.6 percent annual pace that was the weakest since 2002, the Commerce Department reported yesterday.

The housing slump, a deluge of imports and high fuel prices drained the economy during the first quarter and continue to do so. But most analysts are optimistic that the worst is over, with signs that growth is reviving this spring, and the winter lull will turn out to be the low point in the 2000s economic cycle.

“The U.S. economy is at a crossroads,” said Ian Shepherdson, analyst with High Frequency Economics. He said growth will recover only gradually because of the lingering effects of the housing collapse and record-high gasoline prices, which have started to dim the enthusiasm of consumers.

The report showed that consumers maintained spending at a robust clip of 4.4 percent this winter, but their efforts were nearly extinguished by the deep contraction in housing and related industries such as furniture, appliances and home improvements.

Government and business spending did little to boost growth, while a torrent of imports led by higher-priced fuel shipments subtracted steeply from U.S. output, as did an inventory hangover at businesses that were unprepared for the economic slowdown.

Reports on manufacturing in the Chicago and Milwaukee regions published yesterday showed that manufacturing is making a comeback most likely because of a revival in business investment spending, exports and automobile production, but the recovery will be limited by other overarching problems, Mr. Shepherdson said.

“There is still a substantial downside in housing” because of the huge backlog of homes for sale nationwide, he said, and the collapse of housing prices has left consumers with less equity to withdraw to fuel spending.

A study co-authored by former Federal Reserve Chairman Alan Greenspan found that housing equity withdrawals contributed two percentage points to economic growth in 2005, while driving the savings rate below zero as people were able to spend more than they earned.

“It’s pretty alarming if you take the view” that consumers will quickly reverse the process and cut spending to increase their savings, Mr. Shepherdson said. Instead, he thinks the recovery in savings and decline in consumer spending will be gradual. Consumer spending fuels about 70 percent of economic activity.

“We’re now seeing a clear slowdown in retail sales following the spike in gas prices [last month], and it will get worse over the next few months as gas prices eat into people’s pockets,” he said. Moreover, the more subdued rate of consumer spending will not provide enough impetus for more than a minor revival of manufacturing, he said.

“The deceleration of [economic output] has reached its low point,” said Harm Bandholz, economist with Unicredit Markets, who also sees a recovery this spring. He expects growth to pick up to about 2.25 percent this quarter as exports and capital spending increase and businesses restock their shelves.

“We are confident the inventory correction is over,” he said, but he agreed that consumer spending will “expand much more slowly than in previous quarters.”

After pausing the during the winter, Daniel J. Meckstroth, chief economist at the Manufacturers Alliance, sees a gradual recovery in manufacturing this year.

“As long as the general … expansion continues, conditions in manufacturing will improve,” he said. “The manufacturing inventory correction is over, the inexplicable decline in exports has passed … and the worst of the housing collapse has occurred.”

Commerce Secretary Carlos Gutierrez said he was “encouraged that first-quarter growth in consumer spending and business investment, not only held up well, but was higher than previously thought. … Numerous headwinds still haven’t knocked our economy off its 22 straight quarters of growth.”

But Sen. Charles E. Schumer, Democrat of New York and chairman of the Joint Economic Committee, said the “anemic” growth rate “should serve as a wake-up call” that the economy needs help.

“It’s time to change direction, rein in our trade deficit, strengthen investments in innovative industry, kick our dependence on foreign oil, and bolster confidence in our housing market by stemming the tide of subprime foreclosures,” he said.

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