Economy may have seen worst of slowdown

WASHINGTON (Reuters) - The economy slowed markedly over the past several months as the housing market slumped and businesses turned cautious on spending, but there are growing signs the worst may be over.

In the first three months of this year, the economy grew at a scant 1.3 percent annual rate, according to the government's first estimate. Economists expect that figure to be lowered to a downright dismal 0.8 percent in a revision due on Thursday.

But that may be the low point of a slowdown sparked by a huge correction in the housing market and a series of interest rate increases by the Federal Reserve that ended a year ago and that was intended to cool off the economy to slow inflation.

"I think we've seen the worst in the housing sector and I think the scare we had with business capital spending falling off seems to be a little bit alleviated," said Bill Cheney, chief economist at John Hancock in Boston.

In recent months, U.S. factory activity has picked up, consumer spending has been fairly steady, the housing market fallout is showing some signs of stabilizing and job and wage growth have continued.

At the same time, inflation remains slightly above the "comfort zone" of many Fed officials, but it hasn't gotten worse over the past several months.

A key inflation measure, the personal consumption expenditures price index, excluding volatile food and energy prices, advanced at a 2.2 percent rate in the first quarter, a figure economists expect to remain the same when the government's revisions are released on Thursday.

"I think the first quarter is likely to represent the low point of our current soft patch," said Richard DeKaser, chief economist at National City Corp. in Cleveland.

DeKaser and others say an overhang of unsold merchandise in the factory sector appears to be decreasing, laying the ground for a pick-up in production. "That's been one of the impediments on factory activity overall," he said.

In April, U.S. industrial production jumped a bigger-than-expected 0.7 percent on gains in utilities, auto and high-tech manufacturing output after falling 0.3 percent in March, the latest Federal Reserve data show.

Much of the gain can be attributed to activity in the nation's beleaguered auto sector where production advanced by 3.3 percent in April after a scant 0.2 percent March gain.

"The effect of an inventory correction will be less of a drag on (economic growth) than it was in the fourth and first quarters going forward," said Stuart Hoffman, chief economist at PNC Financial Services in Pittsburgh.

In addition, the housing market, though still weak, could be stabilizing, economists say.

In April, new home sales rose 16.2 percent, the sharpest climb in 14 years as builders slashed prices by a record 11 percent, according to the Commerce Department.

But at the same time, existing home sales fell to their slowest pace since June 2003, the National Association of Realtors said last week.

"There have been ups and downs but we've basically established a six- or seven-month plateau in home sales, which is very encouraging," said National City Corp.'s DeKaser.

Consumers, all the while, have managed to keep their jobs, providing a crucial foothold for the economy, even though spending has slowed somewhat.

Over the past year, the economy has added, on average, about 157,000 new jobs a month. In addition, the unemployment rate has stayed low, ticking up just slightly in April to 4.5 percent.

"The big story is whether the American consumer will pull back, but with the job market seeming to hold fairly strong it's hard to see consumer spending dropping seriously," said John Hancock's Cheney.