Economy Springs Out Of Last Year's Rut

The economy sprang out of a year-end rut and zipped ahead in the opening quarter of this year at a 5.6 percent pace, the fastest in 2½ years and even stronger than previously thought.

The new snapshot of gross domestic product for the January-to-March period exceeded the 5.3 percent growth rate estimated a month ago, the Commerce Department reported Thursday. The upgraded reading — based on more complete information — matched economists' forecasts.

"Generally, we had a very good first quarter, but it has to be understood as a bounce back from the fourth quarter," David Wyss, chief economist of Standard & Poor's, told CBS Radio News. "The big news in the first quarter was the consumer basically bouncing back from a very weak fourth quarter, particularly car sales, but then also, we had unusually good weather, which helped housing and construction generally."

Gross domestic product measures the value of all goods and services produced within the United States and is considered the best barometer of the country's economic fitness.

Fresher barometers, however, suggest the economy is shifting into a lower gear in the current quarter.

"From the Federal Reserve standpoint what counts is what's going to happen, not what happened four months ago. So they're trying to look forward, certainly trying to look at what's come out more recently. This is old news for them," said Wyss.

"There's enough strength in the economy to warrant the Fed's continuing tightening," Wyss said. "We do expect the Fed to raise rates a quarter point this afternoon and frankly, I don't think that's the end of it. I think we'll see at least one more move after that."

In a separate report, the Labor Department said that new claims filed for unemployment benefits last week rose by 4,000 to 313,000 — a bit more than economists were expecting.

Economists predict that economic growth in the April-to-June quarter probably slowed to a pace of around 2.5 percent to 3 percent. High energy prices and a more moderate housing market will play roles in the expected slowdown in overall economic activity.

If that turns out to be the case, the economy will have registered a seesaw-like pattern of growth in the last few quarters.

The opening quarter's energetic performance followed a lethargic showing in the closing quarter of 2005 when the economy grew by a feeble 1.7 percent pace. Fallout from the Gulf Coast hurricanes, including high energy prices, prompted belt tightening by people and businesses.

Consumers and businesses came roaring back in the first quarter, though, a main reason why the overall economy performed so well.

Consumers boosted spending in the first quarter at a 5.1 percent pace, compared to a meager 0.9 percent growth rate in the fourth quarter.

Businesses ramped up spending on equipment and software at a brisk 14.8 percent pace, up from a 5 percent growth rate in the prior quarter.

And, companies' profits continued to grow briskly. One measure of after-tax profits in the GDP report showed profits rose 13.8 percent in the first quarter. It was the second consecutive quarter of such strong growth.

The trade picture improved as imports didn't grow as much as previously estimated. That meant the trade deficit shaved only 0.24 percentage point from GDP, compared with a 0.55 percentage-point reduction calculated a month ago.

An inflation gauge closely watched by the Fed showed that core prices — excluding food and energy — rose 2 percent in the first quarter. That was the same as last month's estimate and was down from a 2.4 percent advance in the fourth quarter.

The inflation reading, however, was taken before oil prices shot up to a record high of $75.17 a barrel in late April. They are now hovering above $72 a barrel.

To fend off inflation, which has been creeping up, the Federal Reserve was expected to boost interest rates at the end of its two-day meeting Thursday. The Fed's goal is to rate interest rates enough to prevent inflation from taking off but not so much as to hurt economic activity.

Job growth lost momentum heading in the summer.

Employers boosted payrolls by just 75,000 in May, the fewest new jobs since October.

President Bush, coping with low job-approval ratings, hopes Goldman Sachs chief Henry Paulson — the man who has been confirmed to be the next treasury secretary — will breath new life in the administration's economic agenda.