Yesterday, the Federal Reserve Board tweaked interest rates down slightly, while first-quarter growth numbers were a little better than expected.

The “Advance” numbers on U.S. real (inflation-adjusted) Gross Domestic Product in first-quarter 2008 showed an increase of 0.6%, quarter to quarter annualized, exactly the same level of gain as in the fourth quarter of 2007. While overall growth in the last six months has been the weakest in six years, going back to 2002, it still remains positive and, as such, is more encouraging than many had thought would be the case.

However, the message behind the numbers is a little tricky to read. The percentage change would have been negative except for a build-up of inventories. In turn, more inventories were not a sign of strong production (as happens when the economy is expanding rapidly), but rather the result of declining sales. Furthermore, there is always the possibility that the growth rate might be revised downward a month or two from now. But for the moment, let’s enjoy the by-and-large good news.

Overall consumer spending, which accounts for 70% of GDP, grew by 1.0% in the latest quarter. However, both durables (-6.1%) and non-durable (-1.3%) were in retreat and only spending on services (+3.4%) pulled this component out of the fire. An uninspired auto sector is keeping spending on durable goods under wraps. Rebates and incentive programs have not yet been able to overcome buyers’ concerns about high and rising gasoline and fuel prices, falling house prices and bleaker employment prospects.

Spending on non-residential structures (-6.2%) was negative for the first time in ten quarters and residential investment (-26.7%) continued to act as a major drag on the economy. The years-long downward currency adjustment of the U.S. dollar contributed to a +5.5% figure for exports, while imports trailed in percentage gain at only +2.5%.

On the same day as the latest GDP growth announcement, the Open Market Committee of the Federal Reserve met to adjust interest rate policy. Continuing weakness in the economy has led to a further lowering of the federal funds rate by 25 basis points (100 basis points = 1.00%), yielding a new rate of only 2.00%. At this level, and given a Consumer Price Index (CPI) inflation rate of 4.0%, many “real” interest rates in the United States are now negative. Putting money into many investment vehicles will yield a rate of return that will fall short of the increase in the general price level.

There is not much more downside potential for interest rates. Former Governor of the Fed, Alan Greenspan, has come under criticism for letting the benchmark rate fall to 1.00% during his watch. This may have led to speculative excesses that eventually brought on the current financial crisis. Current Governor, Ben Bernanke, is unlikely to want to ever have to run the same gauntlet of doubt. From here on, it may be left up to the economy to change course on its own.

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