Economy Sizzles
The U.S. economy surged in the first quarter at the fastest pace in more than two years as consumers spent solidly and a year-long trend of sharp cutbacks in business inventories showed signs of tapering off, the government said Friday.
The latest report from the Commerce Department showed the economy snapping back sharply from one of the mildest recessions in history but may not fully resolve lingering concerns about the strength of economic growth going forward.
U.S. gross domestic product, measuring the amount of goods and services produced within U.S. borders, bolted ahead at a 5.8 percent annual rate in the first three months of this year - a full percentage point higher than the forecasts of private economists.
The latest growth in GDP was the strongest since the economy soared 8.3 percent in the final quarter of 1999. After limping through the last six quarters, gross domestic product — the broadest measure of the economy's health — posted its strongest showing since the final quarter of 1999, the Commerce Department said.
The latest GDP report reinforced the view that the country not only emerged from a recession that began in March 2001 but that the downturn will probably go down as the mildest in U.S. history.
The economy's sizzling first-quarter performance is especially remarkable given that the GDP actually shrank at a 1.3 percent rate in the third quarter of 2001. The GDP registered a below-par rate of 1.7 percent in the fourth quarter.
A big factor in the economy's stellar first-quarter expansion was a slowdown in inventory liquidation by businesses. That added a hefty 3.10 percentage points to the GDP, its largest contribution since the fourth quarter of 1987.
During the slump, businesses sharply cut production and discounted merchandise in order to get rid of stockpiles of unsold goods. That was a key source of weakness for the economy and a huge drag on the GDP in the fourth quarter.
Nonetheless, economists said it was crucial for businesses to unload excess supplies in order to set the stage for ramped-up production by manufacturers down the road, which would add to economic growth.
Because the burst provided by the inventory situation in the first quarter is fleeting, many economists estimate the GDP, which measures the total output of goods and services produced within the United States, has slowed in the current quarter to a growth rate of around 3 percent to 3.5 percent.
Federal Reserve Chairman Alan Greenspan told Congress earlier this month that the economy's outlook is looking brighter and that the central bank is in no rush to boost short-term interest rates, now at 40-year lows.
Greenspan estimated the recovery would unfold like a two-stage rocket, with the first stage supplying the initial liftoff in the first quarter of this year with a big swing in inventory restocking by companies. For the rebound to be sustained, he said, it would have to be followed by a second stage of business and consumer spending.
Most economists don't foresee a "double-dip recession," in which the economy slips into reverse. But they question how much of an appetite consumers — who were buying through the recession — will have to spend coming out of it. And, they wonder when business investment will turn around, a necessity for a solid economic rebound.
In the first quarter, consumers, who account for two-thirds of all economic activity in the United States, increased spending at a rate of healthy rate of 3.5 percent, another factor lifting the GDP. But that was a big slowdown from the red-hot 6.1 percent growth in spending in the previous quarter.
Also boosting economic growth in the first quarter was a 15.7 percent rate of increase in spending on residential projects, the biggest gain since the second quarter of 1996. Low interest rates and mild weather in the first quarter powered home sales.