FED IS RUNNING OUT OF ROOM TO HELP ECONOMY

By John Crudele (NY Post)

May 1, 2008 -- THE Federal Reserve is almost at a dead end.

To understand what's happening with the US economy you have to look at two things that happened yesterday - the Fed's decision to cut interest rates by only a little bit and the economy's itty bitty growth in the first quarter. First, the Fed.

Because inflation is out of control, the Central Bank's leader Ben Bernanke - who inherited one helluva mess from his predecessor - is being forced to ratchet down the amount of monetary stimulus he should be providing to the economy.

So a quarter-point rate cut is all that the Fed could spare, what with the dollar declining to record lows on a regular basis, gasoline and other commodities being held captive by speculators and foreign governments bemoaning the lack of self control on the part of Americans.

In another eight weeks the Fed will meet again and it will do NOTHING.

The second thing that happened yesterday was the first-quarter estimate of the nation's gross domestic product - which is nothing more than the financial statement of the country.

I'll apologize here in advance because the rest of this column is going to be numbers - important numbers, to be sure, but mind-numbing digits for which the reader will need a load of caffeine.

Starbucks for everyone! Borrow money from the Fed if you can't afford it.

The Commerce Department estimated yesterday that the nation's economy grew at an annual rate of just 0.6 percent in the first three months of 2008. That was the same growth reported for the fourth quarter of last year.

There are several things that have to be kept in mind.

First, the 0.6 percent is simply an estimate that isn't based on many actual, hard numbers. In fact, it's such a squishy guess that the margin of error is an enormous plus or minus 3 percent.

And before you break out the champagne (or Propel if you're driving) the "annualized" growth of 0.6 percent means the economy in the first quarter expanded at a slothful 0.15 percent. (Divide the 0.6 percent by the four quarters of the year to come up with that figure.)

In other words, if the people of Peoria, Ill. had all suddenly gone on the wagon and stopped buying liquor for a day the economy probably would have contracted.

Worse, it was government spending and inventory building by corporations that created most of the first-quarter gain.

Neither of those is something you want to rely on for a recovery. But the situation was even more dismal than that.

In coming up with the 0.6 percent annual growth figure, the Commerce Department decided that inflation was just 2.6 percent.

That's lower than Wall Street had been expecting and a tad higher than in the fourth quarter.

Still, the 2.6 percent figure for price increases used for the GDP calculation was nowhere near the 4 percent inflation calculated by other government agencies.

If inflation, for instance, had been 4 percent then the nation's economy would have contracted by an 0.8 percent annualized rate.

And not only that, if inflation was being honestly reported the economy would have contracted in the fourth quarter of 2007 as well.

In other words, there would have been two straight quarterly declines in GDP and the debate over whether or not we are in a recession would be settled.

Not that there's any doubt about the recession - housing prices keep dropping, inventory of unsold homes continues to go up, the job situation is weak and family budgets are being drained by the higher cost of everything.

I really hate being a downer, but someone has to honestly assess this data.

In truth, the last two quarters could have had a larger economic contraction than I just explained.

John Williams, who runs ShadowStats.com, says another set of government numbers - the national income figures from the GDP report - shows that Wash ington could be overstating the health of the economy.

As weak as the GDP was, the national income figures hint that Americans might have actually had $139 billion less in come to spend in the fourth quarter than the government believed.

There is some hopeful economic news, which I offer to those of you who might be feeling suicidal about now.

Interest rate cuts could still have a positive impact on the economy. And the tax rebates might help - at least temporarily.

But right now the Fed is dead-ended. It will either have to stay right where it is, or back up. Neither one is a good option.