US growth ahead of expectations

[ikaotiki]

The US economy grew at an annual pace of 0.6% in the first three months of 2008, slightly faster than expected.

The US Commerce Department figures exceeded analyst expectations of an annualised growth rate of 0.2% and eased fears of a recession.

However, there were some worrying signs and consumer spending, a key driver of growth, rose by just 1% in the quarter.

The US central bank is widely expected to cut interest rates to 2% from 2.25% later on Wednesday.

Analysts said that there may be more rate cuts later this year should the rate of economic growth and consumer spending not pick up.

The 0.6% growth in the first quarter was a smidgen better than the 0.58% growth rate seen in the last three months of 2007.

Consumer weakness

Capital Economics said that the figures would "no doubt prompt plenty of speculation that the economy will narrowly avoid a recession".

"We see very little reason for optimism, however. There are some very troubling signs in this report."

Consumer spending, which accounts for two-thirds of economic activity, grew at the weakest rate since the second quarter of 2001, the Commerce Department report showed.

It rose 1% after growing 2.3% in the fourth quarter.

"The outlook on the consumer side is still cloudy. There is no assurance that consumer spending is even steady," said Pierre Ellis, senior global economist at Decision Economics.

Spending on residential construction fell 26.7%, indicating the extent of the slowdown in the American housing sector.

High inventories also masked the true picture, other analysts said.

Stephen Malyon, senior currency strategist at Scotia Capital, said the GDP figures were a bit stronger than market expectations "but the strength is slightly misleading as inventories has accounted for 0.8% of the rise".

"Final domestic demand actually fell 0.4% underscoring the deterioration in the US economy, " he added.

A separate report by ADP Employer Services showed that private sector employers added 10,000 jobs in April, slightly higher than expected.

Analysts say the central bank is still likely to announce a rate cut later.

bbc source