Fed Cuts by a Quarter-Point

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Business investment in plant, equipment, and software was weak as well. It fell at a 2.5% annual rate after rising at a 6% rate in the fourth quarter. That's important because business investment is one of the most volatile segments of the economy, and can contribute to a recession when it suddenly drops a lot.

The worst-performing sector of the economy? Homebuilding, naturally. Residential construction investment fell at an annual rate of 26.7%, the most in 27 years. Consumer spending grew, but at a pace of only 1% per year.

Key Jobs Report Due

Export growth grew at a 5.5% annual rate, which was good but actually below most economists' expectations, possibly due to seasonal quirks in the data. Michael Englund of Action Economics said he had expected growth of closer to 10%, noting that manufacturers have been taking advantage of the weaker dollar to ramp up foreign sales. Following a recent trend, on Apr. 30 both General Motors (GM) and Procter & Gamble (PG) reported strong sales outside the U.S. in the first quarter, reflecting the dollar's weakness as well as healthier growth abroad.

Surprisingly, the U.S. economy may well be in a recession even though GDP growth was reported in positive territory. For one thing, the Apr. 30 report is merely an "advance" estimate that will be updated twice more in coming months, and possibly revised again in future years as new information becomes available. It could turn out that output actually declined in the first quarter. For another thing, GDP growth is only one of the factors considered by the National Bureau of Economic Research—the official arbiter of the U.S. business cycle—in concluding when recessions begin and end.

Employment is another key indicator as to whether the economy is in recession, and it fell in January, February, and March. The jobs report for April will be released on Friday, May 2. Even if it shows an increase, the trend could still be downward. Merrill Lynch (MER) North American Economist David Rosenberg recently wrote: "The reality is that employment almost always goes down slowly at first, and then heavily as the recession gains force—typically, the worst month for payrolls is the ninth month of the downturn."

President Bush on Apr. 29 gave his darkest assessment of the economy yet, saying the nation was in "very difficult times, very difficult." He said there were no easy solutions, adding, "If there was a magic wand to wave, I'd be waving it, of course." Bush did say that his Administration's $168 billion economic-stimulus package, which includes tax rebates that began this week, should help get the economy moving again soon.

Coy is BusinessWeek's Economics editor.