Although we still believe this is a recession, it now seems likely that it will be shallower, but longer than previously anticipated. Like 2001, there might not be the usual two consecutive quarters of negative gross domestic product [GDP] growth, but it will still be a recession, likely to be officially pronounced as one by the Business Cycle Dating Committee of the National Bureau of Economic Research and certainly one in the minds of most Americans.
Most of the upward surprise in the first quarter came from inventories, which could make the second quarter even weaker as the goods are taken off the shelves. The trade gap improved more than we had anticipated a month ago. Final sales to domestic purchasers dropped 0.4%, offset by exports and inventories. Since the GDP announcement, the data we have received on inventories suggest that the first-quarter accumulation could be moved higher. The revised construction data for January and February also suggest stronger economic growth, not a downward revision.
Although there will be a lot more data released before the next GDP revision on May 29, it seems the first quarter is more likely to be revised upward than downward. The data support the Federal Reserve's decision to cut the federal funds rate only a quarter point, to 2%. We expect the Fed to pause until it sees the result of the stimulus package.
Despite our worries about consumers backing away because of the drop in home prices and high gasoline costs, the signs other than autos and items tied to home purchases [such as furniture and appliances] remain strong. Consumer spending rose 0.4% in March, cutting the saving rate to 0.2%. For the first quarter, real consumer spending rose at a 1.0% annual rate, as higher services spending offset weak auto sales and a drop in non-energy nondurables.
The first rebate checks went out the last week of April. The early payment of the checks creates the possibility that more spending will occur in the second...