The US economy grew 0.6% in the first three months of the year as an increase in inventories compensated for weaker consumer spending and a deteriorating housing market.

Despite beating analysts expectations, the Commerce Department's report shows a widespread weakening that many analysts fear will lead to a recession. However, some analysts believe that the US is already in recession.

Global Insight's chief US economist Nigel Gault said: "The economy just kept its head above water in the first quarter. Don't break out the champagne, though. The initial estimate of GDP growth was just the same as in the fourth quarter, but the mix was decidedly less healthy. Growth in the first quarter was positive only because firms began adding to their inventories again; final sales actually fell."

Consumer spending, which drives two-thirds of economic activity through consumption of goods and services, grew at the weakest rate since the second quarter of 2001, when the economy was last in recession. It increased by 1% after growing 2.3% in the fourth quarter.

"Consumers' expenditure entered 2008 Q1 with significant upward momentum but this fizzled out as the quarter progressed. This component of demand will need support from tax rebates if, in Q2, it is even to match its Q1 contribution to GDP," said Stephen Lewis, economist at Monument Securities.

The already shaky housing market received more bad news. Spending on residential construction dropped 26.7%, a ninth quarterly consecutive decline and the biggest for any three months since the end of 1981.

The Federal Reserve will later today announce whether or not they will make further cuts to interest rates. Many analysts predict that the Fed will cut rates by a quarter point to 2%.

"Looking at an economy showing most hallmarks of recession, but not yet contracting in GDP terms, and beset by inflationary pressures on key commodity prices, the Fed is likely to make a small rate cut today (25 bps) and give some sort of a signal that easing is near its end," added Gault.

"But the big danger for the economy is that once the tax rebate effect wears off, the economy stalls again. So the Fed must leave the door open for future action at some point down the road if the hoped-for 'second-half recovery' proves fleeting."

Source: The Guardian