By Jeannine Aversa, AP Economics Writer
Fragile economy improves and tax rebates should spur consumers -- but not out of woods yet


WASHINGTON (AP) -- The fragile economy improved slightly at the beginning of the year and could grow a bit stronger in the current quarter as extra cash from tax rebates spurs people to buy more. Still, it's not out of danger yet.



The economy grew at a 1 percent annualized rate in the first quarter, helped in large part by stronger sales of U.S. products overseas, the Commerce Department reported Thursday.

That was a tad stronger than the government's previous estimate of 0.9 percent growth for the quarter. And, the new reading was better than the anemic 0.6 percent growth rate logged in the final three months of last year.

Nonetheless, the two quarters together marked the slowest growth in five years. The economy has been bruised by housing, credit and financial problems. That led consumers during the first quarter alone to boost their spending at the weakest pace since the 2001 recession.

However, the government's tax rebates, the centerpiece of a $168 billion stimulus package, have helped to energize consumer spending in recent months, which should bolster the overall economy's performance in the April-to-June quarter.

The Federal Reserve, which on Wednesday halted a nearly yearlong rate-cutting campaign because of concerns about inflation, specifically credited "some firming in household spending" with a role in keeping the economy expanding.

As the stimulative effects of the tax rebates fades, though, some analysts worry that the economy could hit another rough patch.

"The economy is far from out of the woods," said Nigel Gault, chief U.S. economist at Global Insight. He predicted second- and third-quarter economic growth would benefit from the tax rebates but he believes there will be a "relapse" in the final quarter of this year as the effect of the rebates wanes.

On Wall Street, stocks tumbled as record-high oil prices and warnings of trouble in the key financial, automotive and high-tech industries rattled investors. The Dow Jones industrials plunged 358.41 points to 11,453.42 -- its lowest finish since Sept. 11, 2006.

Other reports issued Thursday showed weak spots in the economy.

New applications filed for unemployment insurance held steady at a high level of 384,000, the Labor Department said. The number of people continuing to draw unemployment benefits climbed to 3.1 million, the most in more than four years. Employers have cut jobs each month so far this year as they cope with fallout from high energy prices, the housing slump and harder-to-get credit.

The National Association of Realtors, meanwhile, reported that sales of previously owned homes rose in May, although prices continued to drop. Sales went up 2 percent to a pace of 4.99 million units. The median sales price, however, fell to $208,600, down 6.3 percent from a year ago. That was the fifth biggest year-over-year price decline in records that go back to 1999. Many analysts think housing prices need to stop falling or start rising for the ailing housing market to get back its health.

Fallout from the housing crisis continued to be a big drag on first-quarter growth: builders slashed spending on housing projects by 24.6 percent on an annualized basis. That wasn't as bad, though, as the 25.2 percent cut made in the fourth quarter, the most in 26 years.

For now the second quarter is shaping up much better than earlier estimates of little, if any, growth for the period. At one point, some thought the economy might contract. Some second-quarter projections now range from more than 1 percent to just shy of 2 percent.

That still would be considered sluggish. More normal activity would be along the lines of a 2.5 percent to 3 percent pace.

The Fed may be able to leave interest rates where they are for a while so that the economy can gain traction. However, some believe the Fed might be forced to boost rates later this year to fend off inflation.

Others think the Fed won't start to push up rates until next year. Either way, the next move on rates is likely to be up, not down, analysts said. The timing will hinge on how energy and food prices and other inflation barometers behave in the months ahead.

Oil prices zoomed Thursday -- passing $140 a barrel and then retreating a bit to close at a record $139.64 a barrel.

An inflation measure linked to the gross domestic product report showed "core" prices, which strip out food and energy costs, increased at a rate of 2.3 percent in the first quarter. That's up from a previous estimate and outside the Fed's comfort zone.

There's been a lot of talk about whether the country has fallen into a recession. The new GDP statistics did not meet what analysts consider one definition of a recession -- two straight quarters of shrinking economic activity. But that didn't happen in the last recession in 2001, either. And other barometers -- nationwide job losses and shriveling paychecks -- have pointed to a possible downturn. Such a determination is made by an academic panel, usually well after the fact.

"The first half will be more difficult than the second half," Commerce Secretary Carlos Gutierrez told The Associated Press. Although "the predictions were so dire," the first quarter's performance shows "how resilient our economy is by being able to show growth in the face of challenges."

The Fed hopes its powerful series of rate reductions and the government's stimulus will lift the country out of the doldrums over time.

"By the first half of next year we look for the underlying health of the economy to finally improve," said Stephen Stanley, chief economist at RBS Greenwich Capital. "But for the balance of this year, it looks like the economy is trapped in a subpar growth pace but not a recession -- economic limbo."

Published on Wednesday, January 23, 2008 by the Women's International Perspective
Will Bush’s Stimulus Package Work? It Depends on Who You Ask
by Nomi Prins

As the middle and poorer classes get crushed under a mounting pile of debt, and living costs grow faster than wages, we’re becoming a country of two classes: the top 1% and everyone else. Similarly, we are two economies. The national one is comprised of items like GDP (Gross Domestic Product), corporate profits, stock market performance and CNBC. Then, there’s the other one in which most people live: stretching to afford health care, a mortgage, commuting costs, education, kids, parents, and the credit cards that act as temporary pain killers.

The rhetoric surrounding George W. Bush’s economic stimulus package, as boastfully “bi-partisan” as it is (we are, after all, in an election year), indicates a complete lack of comprehension of the difference between this ‘national’ economy and the ‘people’s’ economy, and the extent of the gap between the two.

The unveiling of his plan was classic Bush: state something ambiguous about a $140 billion adrenaline shot, then have your cronies act as wingmen. Hence, at last Friday’s press conference, Treasury Secretary and former Goldman Sachs CEO, Hank Paulson was left fending off uncomfortable questions like: would the plan help “elderly people on fixed incomes?” His answer: “The Christmas season has come and gone.”

The national economy, as measured by large scale figures simply does not represent individual citizens’ economic circumstances. That’s why debate over whether we are in a recession or not misses the point of everyday financial realities for most of the population. According to the standard definition of recession (two quarters or more of a decline in GDP), we’re not there. In which case, Bush and Paulson are technically right in saying the economy is simply ‘slow’.

But, that’s been far from the case if we consider the people’s economy (the people - as in all the American citizens who don’t fall into that upper percent of the nation’s wealth bracket). And very little in the President’s, or in most of the presidential candidates’ plans, will change this.

The highest bidder mentality of Wall Street and its elite private equity groups has exacerbated the sub prime and regular housing market crisis. As investment banks stuffed loans into packages of toxic speculative waste, actual people lost their homes, hurt further by media attention on those declining home values, which didn’t thrill new buyers.

In the process of trying to keep up escalating payments on their homes and home equity loans (backed by falling home values), people increased their credit card balances, suffering requisite late fees and higher rates, and ravaging 401K plans in desperation, during a time in which the values of those plans shrunk along with the falling stock market.

Don’t get me wrong. No one would scoff at an $800 tax rebate check in the mail, but at best, it may provide a month of relief. Meanwhile, it does nothing strategically to fix the barrage of corporate gouging that continues unabated and unregulated by the Washington powers that be (including those running for office). Seriously, wouldn’t it kill you if your health insurance premium rose just as you were about to cash that government rebate?

Home prices fell by a record 6.7% over the year and with legions of unsold homes on the market, they won’t be rising any time soon. The largest mortgage lenders are trying to sell themselves to the banks that once funded them. And banks keep writing down loan values on their books faster than you can say “class action lawsuit.” Credit card companies are starting to see the late payment and defaults that happen when people have maxed out their cards to pay their rising mortgages.

Unemployment has jumped to 5%, or 2001 ‘recession’ levels. And, if more firms fire more employees to ‘cut expenses’, that number will rise. This means people will buy less, which will hurt corporations, who will then fire more people.

We can debate forever whether the average $300 tax rebate in 2001 that the administration claims stimulated the economy did or not. (We can debate whether a similar rebate will or will not this time around.)

But whatever it achieved for the national corporate economy, it did not halt the rise in basic living expenses, health care costs or tuition. More than one out of five middle-class families have less than $100 per week remaining after paying for basic living expenses. In nearly one out of four middle-class families, at least one family member lacks health insurance. And almost one in three families doesn’t have more than a high-school education.

It did not put a leash on credit card companies. American credit card debt has tripled in the past two decades, with African American and Latino households carrying a higher percentage of debt than White ones. Americans over 65, targeted by predatory credit card companies, experienced the greatest increase in debt carried. Meanwhile, industry deregulation means there are no rate or fee caps. Credit card issuers raked in $8 billion of fees between 2004 and 2005. To cope with the rising credit card debt, Americans raided the equity in their homes, whose values seemed to be only rising - until they stopped. From 2001 to 2006, homeowners cashed out $1.2 trillion in equity. Those loans will need to be repaid.

It did not halt the increase in the wealth gap. Over the past two decades, wealth in the top 2% of the country has doubled; in the bottom quarter, it has declined.

It did not halt the fraud or questionable lending practices of the housing market players. The list of investigations has just begun.

It did not halt the decrease in average American wages per hour.

It did not halt the unemployment gap between white and black Americans. In general, the black unemployment rate is twice that of whites, more in recessionary times. The black prison rate also rises with the unemployment gap.

It did not halt the life expectancy gap. The rich live longer than the poor by 6 years.

It did not halt the deletion of employee retirement plans. Only one out of five private sector workers has a traditional pension. It did not replenish the Social Security system. None of the candidates has addressed pensions or social security in any meaningful way - saying ‘we’ll fix it’ is not meaningful.

Bush acknowledged that “continued instability in the housing and financial markets could cause additional harm to our overall economy.” However this is a convenient excuse to push his last economic hurrah - making his tax cuts permanent. The president behind the biggest corporate tax breaks in two decades also wants to “bolster business investment and consumer spending.” That doesn’t mean he cares about the average person’s quality of life.

But, we don’t expect more from him. From the ‘candidates of change’ however, we should demand more meaningful policy that truly enriches the main street economy.

Cap credit card rates and fees, and make credit card companies offer repayment schemes at lower rates that aren’t designed to further screw borrowers. Remove prepayment penalties for primary homebuyers and make banks proactively extend offers on loans with reduced interest rates (now at 2005 levels).

(Note to my bank: how come you’re not passing on the love from today’s 75 basis point rate cut to my mortgage rate?)

Get rid of insurance companies as an impediment to affordable health care. Either shift the burden of retirement risk back to the corporations that get the tax breaks, or don’t give them tax breaks. Increase the education budget dramatically, so that more minorities, working poor and middle class can get advanced degrees. Tax private equity titans at the same levels as regular citizens.

Place the focus back on the majority of the population: increase collective wealth and not the wealth gap, and GDP will follow - on a more stable, long term platform.

Nomi Prins is a journalist and Senior Fellow at Demos, a non-partisan public policy research and advocacy organization. She is the author of Other People’s Money: The Corporate Mugging of America and Jacked: How “Conservatives” are Picking your Pocket (whether you voted for them or not).

C