Major Recession is in store for US economy*

29.04.2007

The worst economic growth in four years is raising concern that troubles
in the U.S. housing market will spread and throw the country into a
major recession before the year is out.

The economy practically crawled at a 1.3 percent pace in the opening
quarter of 2007, the Commerce Department reported Friday. That was even
weaker than the sluggish 2.5 percent rate in the closing quarter of last
year.

The main culprit in the slowdown: the housing slump, which made some
businesses act cautiously. The bloated trade deficit also played a role.

Consumers largely carried the economy in the first quarter. But will
they stay resilient in light of the troubled housing market, fallout
from risky mortgages and rising energy prices?

"The No. 1 question is can the consumer continue to play Atlas while the
housing market crumbles around him?" said Richard Yamarone, economist at
Argus Research. Others worry about businesses' appetite to spend and
invest — also important ingredients for a healthy economy.

Friday's report brought some of these uncertainties to the fore. For
now, though, economists believe the risk of a recession is low. Former
Federal Reserve Chairman Alan Greenspan has put the chance of a
recession this year at one in three.

Federal Reserve Chairman Ben Bernanke, however, has said he doesn't
believe the economic expansion, now in its sixth year, is in danger of
fizzling out. Neither does the Bush administration.

The reading on gross domestic product in the first quarter was the
weakest since a 1.2 percent pace in the opening quarter of 2003. GDP
measures the value of all goods and services produced within the United
States and is considered the best barometer of the country's economic
fitness, the AP reports.

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, up from a 1.8 percent fourth-quarter gain. Fed Chairman Ben
S. Bernanke is among policy makers that have said a 1 percent to 2
percent increase is preferable.

Consumer spending, which accounts for about 70 percent of the economy,
rose at an annual rate of 3.8 percent last quarter, compared with a 4.2
percent pace in the previous three months. Before today's report,
quarterly consumer-spending gains averaged 3.7 percent the past decade.

Home construction fell at an annual rate of 17 percent last quarter,
after contracting by 19.8 percent in the previous three months. The
decline subtracted 1 percentage point from first- quarter growth. The
last time spending on home construction dropped for six consecutive
quarters was in 1981-82, Bloomberg reports.

A second report, from the Labor Department, demonstrated corporate
efforts to keep employee benefits damped, with overall employment costs
rising a smaller-than-expected 0.8 percent in the first quarter.

That occurred despite a 1.1 percent gain in wages and salaries, the
strongest since a 1.3 percent rise in the first quarter of 2001, as
benefits costs edged up a scanty 0.1 percent, the least since a matching
0.1 percent rise in the first quarter of 1999.

The GDP report showed some signs of resilience in business investment,
with spending up at a 2 percent rate in the first quarter, partly
recovering from a 3.1 percent decline in the closing quarter of 2006.

Exports declined at a 1.2 percent rate in the first quarter, a sharp
reversal from the fourth quarter's 10.6 percent advance. It was the
first decline in exports since the second quarter of 2003 when they fell
at a 1.7 percent rate, Reuters reports.