First-Quarter GDP Revised Downward

The economy surged ahead at its fastest pace in nearly two years in the first quarter, although it grew a bit slower than initially thought, the government said Friday.

Gross domestic product, a measure of the goods and services produced within U.S. borders, raced forward at a revised 5.6 percent annual rate in the first three months of the year, the Commerce Department said. A month ago the department had said GDP advanced at a 5.8 percent pace.

Economists polled by Reuters had expected GDP growth to be revised up to an increase of 6.0 percent.

While first-quarter GDP growth was little changed from the earlier estimate, the report showed consumer spending and business investment was weaker than thought earlier, suggesting the economy's underlying strength at the start of the year was less pronounced as well.

Even so, the revised first-quarter performance was remarkable given the economy actually shrank at a 1.3 percent rate in the third quarter of 2001. GDP grew at a below-par 1.7 percent rate in the fourth quarter.

President Bush has credited his $1.35 trillion tax cut package enacted last year with helping to pull the economy out of recession. He wants to make sure the recovery stays on firm footing.

So does the Federal Reserve. Citing uncertainties about the vitality of the recovery, the Fed earlier this month decided to leave short-term interest rates unchanged at 40-year lows.

Low interest rates should motivate consumers to continue buying and for businesses to step up investment, which would help the economic recovery. Consumer spending accounts for two-thirds of all economic activity.

Federal Reserve Chairman Alan Greenspan has warned that the recovery could be less than sizzling because consumers, who kept buying throughout the slump, might not have a lot of pent-up demand coming out of it.

Many economists believe economic growth slowed in the current quarter to between 3 percent and 3.5 percent — still considered a respectable pace.

Another factor that could affect consumer behavior is the job market. The nation's unemployment rate is at a nearly eight-year high of 6 percent and is expected to rise to around 6.5 percent this summer. That's because analysts believe companies will be slow to hire back workers until the recovery is assured.

One of the reasons the first-quarter GDP was revised down a bit from the previous estimate is because consumer spending was slightly less brisk. Consumer spending grew at a rate of 3.2 percent, down from 3.5 percent previously reported.

Spending by businesses on new plants and equipment also was weaker, contributing to the lower GDP estimate. Businesses cut this spending at an 8.2 percent rate, deeper than the 5.7 percent decline previously estimated. Capital investment has dropped for five straight quarters, a key behind the economy's plunge into recession.

Economists said a vital ingredient to a solid and sustained economic recovery is a turnaround in capital spending.

One of the biggest sources of strength in the first quarter came from a slowdown in inventory liquidation by businesses. That added a sizable 3.47 percentage points to the GDP.

Another big boost come from a whopping 18.3 percent growth rate in federal government spending on national defense. That marked the biggest increase since the first quarter of 1967.

Friday's report also showed the after-tax profits of U.S. corporations edged up 0.9 percent in the first quarter, the first increase since the third quarter of 2000.

The 5.6 percent growth rate in GDP marked the fastest pace since the second quarter of 2000.

Based on the current GDP data, the drop in economic output during the recession was a small 0.3 percent, which would be the mildest recession on record. That record has been held by the 1969-1970 recession, when GDP fell 0.6 percent.