Growth Sparks Cautious Optimism

Shoppers opening their wallets was the key reason why the U.S. economy showed surprising strength in the first quarter, reports CBS News Business Correspondent Anthony Mason.

But while the economy may have averted a recession, many businesses are still waiting for a turnaround.

Government figures released Friday showed growth of 2 percent in the nation's gross domestic product in the first three months of 2001 — twice the 1 percent that was expected. The economy grew 1 percent in the last three months of 2000.

The growth rate in the January-March quarter reflected strength in consumer spending, which was rising at an annual rate of 3.1 percent.

That reflected a huge jump in spending on durable goods — such as cars, appliances and furniture — which soared at an annual rate of 11.9 percent after having shrunk at an annual rate of 3.1 percent in the fourth quarter.

"The most positive thing that's going on is that consumers are still out there buying," said Mark Zandy of economy.com. "I mean they're buying cars. And they're buying houses."

New home sales jumped 4 percent in March, their best sales month ever.

And in a further psychological boost, Federal Reserve Chairman Alan Greenspan had some kind things to say about the possible future of the U.S. economy.

Some analysts had predicted that the first-quarter figures would signal the onset of a recession.

Not only did the GDP remain in positive territory, but the 2 percent pace was double the 1 percent growth rate of the final three months of 2000 and also double what many analysts had been expecting for the first quarter.

For example, the company that makes "bubble wrap" enjoyed double-digit growth in each of the past five years. But now, sales at the Sealed Air corporation have stalled.

"Business is essentially flat," said Bill Hickey, as corporate customers try to cut back wherever they can. "Our customers are being extremely careful and cautious and actually asking us for further opportunities to bring their costs down."

The GDP surprise helped the stock market rally again Friday. The Dow Jones industrial average jumped 117.70 points to close at 10,810.05 and is now in positive territory for the year. The Nasdaq rose 40.80 points to 2,075.68 and the Standard & Poor's climbed 18.53 to 1,253.05.

Greenspan had worried earlier this year that economic growth might have stalled out altogether, ending the country's record 10-year-long economic expansion. The Fed in January began cutting interest rates aggressively in an effort to ward off a downturn.

With a positive GDP, many economists believe the United States may have escaped the period of maximum danger for a recession. They are looking for growth to improve further in coming quarters.

But Zandy says the GDP numbers aren't all good news, because "The dark side of this report is that investment by businesses in information technology has collapsed."

That's why tech giants like Cisco, Intel and Lucent have been cutting tens of thousands of jobs. And those mounting layoffs could undermine the consumer confidence that's keeping the economy afloat.

"Which all adds up to an economy which is still struggling and barely keeping it's head above water," says Zandy.

Meanwhile, many business are waiting and watching. At Sealed Air, they're ready to ramp up production again when their customers send the signal.

"But at this point we haven't seen that yet," says Hickey.

An inflation gauge tied to the GDP did not paint a reassuring picture. It showed prices rising at an annual rate of 3.3 percent in the first quarter, the fastest pace in a year, reflecting higher costs for services such as medical care and for natural gas and electricity.

Still, the boost in consumer spending contributed more than 2 percentage points to growth in the first quarter. Another big positive factor was a narrowing trade deficit, reflecting a drop in imports, which added 1.4 percentage points to growth, the first positive contribution from trade in more than two years.

Other boosts to growth came from a rebound in housing construction and strong spendin by governments.

The biggest drags on growth in the first quarter came from a continuing effort by businesses to reduce an overhang of unsold goods.

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