The Commerce Department’s first-quarter revision shows that the U.S. economy this winter stalled to its slowest pace since late 2002, due in no small part to slower business production and, in particular, a massive trade deficit. Because most economists agree that the economy probably bottomed out in the first three months of the year, the good news (if you can call it that) may be that there is no direction for the economy to go but up.

Economic activity in the manufacturing sector expanded in May for the fourth consecutive month, while the overall economy grew for the 67th consecutive month, according to the latest Manufacturing ISM Report On Business, issued today by the Institute for Supply Management (ISM) Manufacturing Business Survey Committee.

Looking at the whole economy, the United States Commerce Department reported late last week that it had revised the broadest indicator of economic strength, measuring all goods and services produced in the U.S., to show an advance of 0.6 percent — less than half the 1.3 percent reported in its first estimate in May.

“The major culprits were the trade deficit, which swelled even more than first estimated, and slower business production,” according to The New York Times. “Those problems added to the strain on the economy from the weak housing market and held down growth to the slowest pace recorded since the end of 2002,” NYT explains.

Despite lackluster figures, NYT adds, “business production is poised to pick back up not only as foreign countries buy more and more American goods but also as American businesses start replenishing their inventories. Inventories declined in value by $4.5 billion in the first quarter” after the government first estimated that inventories increased by $14.8 billion.

While we all hope people in foreign countries buy more, the picture of what is happening as it pertains to consumer expenditures in the U.S. appears fuzzy. For one, wage increases have not been keeping pace with inflation. Simultaneously, gas prices have been climbing and the housing market slump in much of the country is “sapping homeowner equity,” as NYT notes. Consequently, economists say that consumers have been less free to spend their disposable income.

On the other hand, the Commerce Department’s statistics for changes in disposable personal income (in first quarters by year) shows that after a 1.8 percent drop in the first quarter of 2005, disposable personal income bounced up 6.8 percent in the first quarter of 2006 and 8.2 percent in Q1 2007.

Yet if economists’ are guessing that consumers are feeling less free to spend, last week’s Conference Board survey about confidence makes things less clear.

According to the research firm’s latest Consumer Confidence Index, which had decreased in April, consumer confidence bounced back in May. The Index now stands at 108.0 (1985=100), up from 106.3 in April.

Based on a representative sample of 5,000 U.S. households, the survey found:

… [C]urrent-day conditions was more upbeat in May. Those claiming conditions are “good” rose to 29.4 percent from 27.5 percent. Those saying conditions are “bad” was barely unchanged at 14.5 percent. Consumers were also more neutral about the labor market. The percentage of consumers saying jobs are “hard to get” dipped to 19.9 percent from 20.3 percent. Those claiming jobs are “plentiful,” however, remained at 29.0 percent in May.

Consumers’ outlook for the next six months remains cautious, according to last week’s announcement of the survey results. “Those anticipating business conditions to improve increased to 15.1 percent from 13.8 percent,” The Conference Board reports. “Consumers expecting business conditions to worsen, however, edged up to 10.1 percent from 9.7 percent.”

That expectations for worsening conditions edged up may have resulted from increasing unemployment in the manufacturing sector.

According to Automatic Data Processing, May saw 10,000 people in manufacturing laid off and 23,000 let go from the goods producing sector. The report did not delve into if the job losses were due to automation, offshoring or both. The people polled regarding their confidence and who anticipated improving conditions may have been among the 120,000 who took jobs in the services sector.

On the other hand, profits for manufacturing corporations over the last three years have been trending upward: US$150 billion in 2004, US$254.8 billion in 2005 and US$311.7 billion in 2006. The Commerce Department hasn’t yet tallied manufacturing corporate profits for the first quarter of 2007. What the department does note, though, is that “in the first quarter, both real gross corporate value added of non-financial corporations and profits per unit of real value added increased.”

If uncertainty about the balance of trade and energy supplies poses questions about the direction the economy will take, so too does the changing situation in government.

“Don’t expect any tax relief from the Democrat-led Congress, but a renewed emphasis on R&D is likely,” writes Thomas J. Duesterberg, president and CEO of the Manufacturers Alliance/MAPI, for IndustryWeek.

In his national report in April, UCLA Anderson Forecast senior economist David Shulman noted that a recession “is not imminent for the U.S. economy.” However, Shulman concedes that the period of below-average growth will last longer than previously believed before the economy returns to normal.

According to the UCLA Anderson Forecast report’s announcement:

In its first quarterly report of 2007, the UCLA Anderson Forecast remains steadfast in its belief that the national economy does not face recession, though the group’s economists concede that length of the current, below trend growth period leaves them “increasingly nervous.” The Forecast in particular notes that, ” … the credit crunch in the subprime mortgage market will likely trigger a second leg down in the housing market in terms of output and prices.” The Forecast asserts that the slowed economy may well endure longer than previously expected, but that better-than-expected consumption, a “less-negative” trade sector and at least two and possibly three rate cuts will keep Gross Domestic Product (GDP) positive throughout 2007.

Undoubtedly, many factors play a role in the U.S.’ economic performance. Some critics argue that the Chinese keeping its currency artificially low is contributing to “the U.S.’ mammoth trade deficits and a loss of U.S. factory jobs,” NYT points out.

In fact, according to NYT, the good news is a bit of a paradox:

Most economists agree that the economy probably bottomed out in the first three months of the year and they have forecast a rebound as some of the economic forces that subtracted from growth in the first quarter reverse. Trade is one of those forces. While the revised gross domestic product figures showed that imports rose faster than first estimated, slower consumer spending should soon damp the influx of foreign goods, economists said. At the same time, demand for American goods and services in Asia and Europe is growing — and getting an added boost because of a weaker dollar.

So, basically, there’s no direction for the U.S. economy to go but up?

What do you think? Is a rebound on the horizon, or is there another depth to which we can sink?