In no surprise to anyone (for a change) the GDP was revised lower to 0.6% in first quarter.

The U.S. economy slowed to a crawl in the first quarter, held back by falling investments in homes, shrinking inventories and a large trade gap, the Commerce Department reported Thursday.

The economy grew at a 0.6% annualized pace in the quarter, revised down from the initial estimate of 1.3%, the government said in its second estimate of quarterly gross domestic product. It was the slowest growth since late 2002.

The economy has grown just 1.9% in the past four quarters, well below the 3% growth most economists say is the long-run potential. It’s the weakest year-over-year growth in four years.

“The details of the report suggest some reasons for even more optimism for the second quarter,” wrote Drew Matus, an economist for Lehman Bros. The faster businesses cut their inventories, the sooner they’ll be ready to ramp up production again.

Considering the large upward revision to consumer spending, the report “will widely be viewed as a positive when the details are scoured,” wrote Tony Crescenzi, chief bond market strategist for Miller Tabak & Co. Although the drags from inventories and home building will lessen in coming quarters, consumer spending is weakening, he said.

“The composition of GDP will turn unfavorable in the second quarter, putting into question the sustainability of a rebound in GDP,” Crescenzi said. Data on consumer spending will be the main variable to watch.

Select Details of GDP

  • Real consumer spending increased 4.4% annualized, the fastest in a year, compared with the 3.8% initial estimate. Spending on durable goods increased 8.8%, spending on nondurable goods rose 3.5% and spending on services increased 4%.
  • Consumer spending contributed 3 percentage points to growth.
  • Business fixed investments increased at a 2.9% annual pace, revised up from 2% earlier. Investments in equipment and software rose 2%, while investments in structures increased 5.1%. Business investments contributed 0.3 percentage points to growth.
  • Inventories shrank by $4.5 billion. The change in inventory investment cut 1 percentage point from growth.
  • Exports fell 0.6%, the biggest decline in four years. Meanwhile, imports rose 5.7%. The trade deficit cut 1 percentage point from growth.
  • Government spending rose 1% in the first quarter. Federal spending fell 3.9%, including a 7.3% drop in national defense spending. State and local government spending rose 3.9%.
  • Government spending contributed 0.2 percentage points to growth.

Note that the 4th quarter 2006 GDP was also revised dramatically lower (see US GDP Flunks Smell Test). Now we are starting see the same thing happen with 1st quarter 2007 estimates. Is there a pattern here?

If one believes as I do, that the first 2% of GDP is hedonics, imputations and other fictional activity (e.g. the estimated value of things like free checking accounts – yes I am serious – added into the GDP numbers), then we are already in a recession starting now.

What is most interesting is the notion that this is some sort of optimistic report. It is not. Rather than looking at inventories that have to be replenished, the correct way to look at things is that GDP was up a mere .6% in spite of very robust consumer spending. If +.6% GDP is all we can muster with strong consumer spending, it should be obvious what will happen when consumers toss in the towel.

Home Prices Rise

In unrelated news I see that Home prices rise at slowest pace in 10 years.

U.S. home prices increased 0.5% in the first quarter, the slowest quarter-to-quarter price gain in 10 years, the Office of Federal Housing Enterprise Oversight reported Thursday.

The OFHEO price index shows home prices are up 4.3% compared with a year earlier, the smallest gains in 10 years. Price appreciation has slowed sharply from a 13.7% year-over-year gain in 2005.

“Prices are rising slowly in most areas,” said Patrick Lawler, chief economist for the federal agency, which regulates mortgage giants Fannie Mae and Freddie Mac. The price index is derived from mortgage data from the two companies.

In the OFHEO index, prices fell in seven states from the fourth quarter to the first, including California, Nevada and Florida, three states that saw the largest price gains in 2004 through 2006.

Prices were dropping at a 3.4% annual rate in California and at a 2% annual pace in Nevada and Massachusetts.

Prices were down quarter-to-quarter in 96 of 285 cities, including 13 of 18 Florida cities and 22 of 26 cities in California. Among 22 major cities around the nation, prices were falling in eight.

On a year-over-year basis, prices fell in two states: Michigan and Massachusetts.

It borders on ridiculous to suggest with a straight face and no explanation that “Home prices are rising slowly in most areas“. Home prices are not rising and have not been rising for at least a year. Want proof? Just ask the CEO of any homebuilder if home prices including incentives are rising. I suspect they would all laugh in your face.

Yesterday in Housing prices: Comparing Shiller and HPI I was wondering whether or not the numbers will tell us what we already know: home prices are falling. The numbers are in. Surprise Surprise Surprise. We now have to wait at least another quarter for a government agency to tell us what we all knew many months ago.

This post originally appeared in Minyanville.

Mike Shedlock / Mish/