Slow GDP Growth Could Be a Red Flag

News came out last Thursday that confirmed what everyone knew; the economy in the United States is slowing and could lead to a recession. According to the Commerce Department, gross domestic product (GDP) for the fourth quarter of 2007 grew at the snail-like pace of 0.6%, well below the 4.9% increase in the third quarter.

Looking ahead to the first quarter of 2008, GDP is predicted to rise a slower 0.4%, according to the National Association for Business Economics. If this happens and is followed by slower growth in the second quarter, it would signal a recession.

It is clear that the country could be heading into a recession based on the GDP reading along with recent economic data. Compare the stagnant growth at home to the stellar growth in China in which the fourth quarter GDP surged 11.2%. Despite efforts by the People’s Bank of China (PBOC) to halt the growth, the World Bank predicts that China will grow at 9.6% this year, which is way ahead of what we will see in the U.S.

Continued problems in the housing and credit markets are impacting the growth in U.S. The problem that is more concerning is that inflation remains an issue that could cause a precarious economic condition called “Stagflation,” where an economic slowdown is associated with inflationary pressures. This has not occurred since the 1970s.

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Moreover, the labor market is also showing some fragility as we are seeing more companies announce major layoffs. The weekly first-time claims were weak with claims up by 19,000 to 373,000 for the week ending February 28, according to the Labor Department.

Investors are hoping that the Federal Reserve will reduce interest rates by another 50 basis points at its next FOMC meeting on March 18. However, it may be premature to assume that the aggressive cuts will help the U.S. economy sidestep a recession in 2008.