September 5, 2007

U.S. economy bounces but may not hold for long

WASHINGTON

The U.S. economy enjoyed a strong revival in the spring although growing troubles in housing and credit markets have darkened prospects considerably since then.

The gross domestic product, the broadest measure of economic health, expanded at an annual rate of four per cent in the April-June quarter, the U.S. Commerce Department reported. That was the strongest showing in more than a year and considerably higher than the 3.4 per cent estimate for growth made a month ago.

The improved performance reflected higher activity in such areas as international trade and business investment, which offset a continued plunge in housing construction.

But that growth could be the best showing for some time as the economy continues to be battered by the worst housing slump in 16 years and a widening credit crisis that has sent financial markets on a roller-coaster ride in recent weeks.

“The economy has taken a significant blow from the turmoil in financial markets and the housing downturn, which is intensifying,” said Mark Zandi, chief economist at Moody’s Economy.com.

Many economists said they expected growth to slow to around two per cent in the current quarter, just half the spring pace, and perhaps dip below two per cent in the final three months of this year as the impacts from the market turbulence on consumer and business confidence take more of a toll.

But analysts said they still believe the current economic expansion, which will be six years old in November, will be able to avoid a full-blown recession.

“While a recession in the United States is clearly possible, one of the biggest positives going forward is that the rest of the world still looks good, which means we will get continued help from rising exports,” said Nigel Gault, chief U.S. economist at Global Insight.

An improved trade per-formance, representing higher sales of American products overseas and lower imports, was the biggest factor contributing to the second quarter improvement, adding 1.4 percentage points to the four per cent growth rate.

Analysts said they also had confidence the Federal Reserve would act in time to ward off a recession by cutting interest rates should current financial troubles intensify.

The Federal Reserve’s next meeting is Sept. 18 and analysts are predicting the Fed will start cutting the federal funds rate at that time, delivering from two to four quarter-point reductions this year and early next year. The funds rate has been at 5.25 per cent for more than a year.

Canada’s Central Bank is also expected to cut rates or hold steady.

Those cuts would make borrowing cheaper for consumers and businesses and also help to mitigate the payment shock facing two million mortgage holders as their adjustable rate mortgages reset in coming months.

Hopes for a rate cut were increased when the Fed, in a special statement on Aug. 17, aimed at calming financial markets, said the “downside risks to growth have increased appreciably,” indicating it was now more worried about weak growth than inflation.

In a second report, the Labor Department said the number of Americans filing claims for unemployment benefits rose for a fifth consecutive week, increasing by 9,000 to 334,000 last week, the highest level since April.

Analysts said some of those gains probably came from rising layoffs in the mortgage industry, where many firms specializing in offering subprime loans have had to cut payrolls or shut down.

Recent drops in consumer confidence since the market turmoil could depress spending further in the months ahead.

DCN NEWS SERVICES

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