The US government confirmed today (March 27) that the gross domestic product grew at a miniscule .6% during the fourth quarter of 2008.  This matched previous analyst forecasts for the October through December quarter.  Many economists will be watching closely during April, as the government issues its estimate for the first quarter 2008 GDP.

Surveys over the last couple months have shown that a majority of economists and financial experts believe the first quarter GDP will provide evidence of a shrinking economy.  Given that housing and mortgage struggles have grown in the last several months, it would be hard to believe that the economy would be in better position.  The good news is many leading US analysts believe the drop should be small, potentially giving hope to a potential turnaround for the second half of 2008.

There still seems to be some question as to whether the US economy faces a likely recession.  There are a couple different commonly applied rules for recessions.  The most popular definition calls a recession a period of six successive months of a contracting gross domestic product.  This means that if the economy continues to shrink through the second quarter, assuming it has in the first, a recession could be defined.

Regardless of whether the current economy fulfills recession requirements or not, the bigger concern for Americans is whether and when things will get better.  Looking at recent drops in new home sales and national home prices do not inspire hope.  Credit companies continue to struggle, but the news has not been as overwhelmingly negative as of late.  Housing did have a positive early this week when existing home sales climbed for the first time in four months.

Economists are closely monitoring key economic factors to decide when a turnaround could happen.  Many seem comfortable in saying it could happen during the second part of 2008.  Gas and oil have stabilized a bit after non-stop climbs.  The dollar is still historically weak, but its relentless pursuit of mediocrity has stalled.  Another positive economic statistic shows that exports grew significantly based on the weak dollar and cheap prices for foreign companies.

To be fair, the current economy is definitely not sending out anything in the way of sparks of promise.  There seems to be a general sense of calm filtering through many financial, investment and consumer circles, however.  Consumers are still nervous about gas prices and food.  Part of the hope stems from expectations that the deep Fed rate cuts and May’s $168 million economic stimulus could have a big impact on the economy.

The good news for the Fed is that inflation seems to be holding off a bit.  Overall, inflation rose 3.9% during the fourth quarter of 2007, but core inflation fell from 2.7% to 2.5%.  Core price measures exclude food and energy, and they are considered a good indication of inflation.  The 2.5% is still above the Fed’s preferred 2% level, but it shows that inflation is holding steady to give the Fed more time to focus on the economy.  Managing inflation often takes opposite techniques from stimulating the economy.

It will definitely be interesting to see what happens with the first quarter GDP estimate.  Economists and investors will certainly be watching closely.  While a small drop might be expected, a large drop or any gain could create a stir in many financial markets.  Investors would likely react very favorable to a positive surprise.  Consumers are currently more concerned with managing transportation in lieu of rising gas prices, and buying groceries for their families.  Of course, all Americans would be excited to hear positive news about the economy.

Market Recap

Stocks dropped Wednesday, with the Dow down 109 points.  The NASDAQ and S&P dropped 16 and 11 points.  Oil prices moved back up after the latest inventory report.  In more bad housing market news, new home sales dropped for the fourth month in a row.  The government confirmed Thursday that gross domestic product did grow at the .6% that was estimated for the fourth quarter of 2007.  Many are suggesting a shrinking GDP for the first quarter of 2008.  The Dow dropped 120 on the news.  The NASDAQ and S&P were down 43 and 15.  Red Hat reported strong earnings, which was a positive note for the day.  The dollar fell back to lows again against many major currencies.

Neil Kokemuller
Thursday, March 27, 2008
7:30 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA.  He has a MBA from Iowa State University with a specialization in marketing.

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