WASHINGTON – U.S. economic growth surged in the first quarter at its fastest pace in more than two years, roaring out of the 2001 recession with surprising strength, the government said on Friday.
However, some questions lingered about whether the economy could keep up such an energetic clip and this, combined with data showing a slip in consumer sentiment, reined in U.S. financial markets.
U.S. gross domestic product, measuring the value of goods and services produced within American borders, raced ahead at an annual rate of 5.8 percent in the first three months of this year -- a full percentage point higher than the forecasts of private economists.
The gain was the strongest since the economy soared 8.3 percent in the final quarter of 1999.
"We are seeing broad-based strength in spending, which will continue to boost production in future," said Steve Wood, chief economist at FinancialOxygen in Walnut Creek, Calif. "It suggests that we will get into a self-sustaining economic recovery."
IF YOU GOT THAT SWING
A big driving force behind GDP strength was an "inventory swing" that occurred as businesses, who had worked to empty their shelves last year, relied much less heavily on existing inventories to meet demand for their products. But consumer spending held up well and there were tentative signs the severe contraction in corporate investment may be drawing to a close.
The GDP report, while positive, was not enough to fully erase the nagging worry expressed by many economists, including Federal Reserve Chairman Alan Greenspan, that the pace of growth may turn out to be lackluster in coming months.
Indeed, such concerns gained traction on Friday after the University of Michigan reported that its closely watched survey of consumer sentiment retreated in April.
The final April sentiment reading dipped to 93 in the latest month from 95.7 in March as a sluggish stock market and conflict in the Middle East weighed on Americans' moods.
Stocks rallied on the GDP but later succumbed to selling amid a mixed bag of corporate earnings and doubts among traders that the pace of growth would remain vigorous. Inflation-sensitive bond prices turned positive after initial weakness.
"You get this impression the second quarter is going to be a lot less robust," said Henry Herrmann, chief investment officer at Waddell & Reed.
President Bush on Friday called first-quarter economic growth "an encouraging sign," but said he agreed with his economic team that the swing in inventories was "a major force contributing to the high growth figure." "This means that the impetus behind growth won't last very long, that we must continue working to make sure this short-term recovery is a long-term recovery," Bush said.
Economists said overall economic growth should moderate in coming quarters. One-time factors, such as big tax refunds and favorable weather, were seen as helping to boost growth in the early part of the year.
"The implication from the larger swing in inventories is that it means it will be harder to get stronger GDP numbers in subsequent quarters. We won't have as much of an additional swing lifting GDP numbers in subsequent quarters," said Mark Vitner, economist with Wachovia Securities in Charlotte, N.C.
The first-quarter gain follows growth of 1.7 percent in the fourth quarter of 2001 and a contraction of 1.3 percent in the third quarter.
An elite panel of academic economists at the National Bureau of Economic Research has said the U.S. economy entered a recession in March 2001. But the NBER -- considered the arbiter of U.S. business cycles -- has not yet ruled on when the recession ended.
Many private economists have pegged the end of 2001 as a time when the economy appeared to turn the corner to recovery and the latest GDP figures added weight to those assumptions.
An abrupt slowdown in the pace at which firms pared back inventories of unsold goods added a hefty 3.1 percentage points to first-quarter GDP. Businesses cleared $36.2 billion worth of inventories from their shelves in the first three months of this year, a much smaller reduction than the $119.3 billion that firms unloaded in the fourth quarter.
Consumer spending grew a healthy 3.5 percent. An 8 percent drop in spending on durable goods such as cars was offset by an 8.4 percent surge in purchases of nondurable items like clothes. The gain in nondurable goods was the biggest since an 8.9 jump in the second quarter of 1975.
Corporate spending on new plants and equipment fell, but its drop in the first quarter was smaller than those of other recent quarters. Business investment on structures, equipment and software fell 5.7 percent in the first three months of this year after it plunged 13.8 percent in the fourth quarter.
The equipment and software component of business investment fell a minuscule 0.5 percent in the first quarter, which many economist found heartening.
The strong first-quarter GDP figure is unlikely to alter expectations that the Federal Reserve will keep interest rates steady at its next policy-setting meeting on May 7.
The Fed, which chopped overnight interest rates to a 40-year low of 1.75 percent last year, is widely expected to begin nudging interest rates higher sometime later this year.
But Fed officials have indicated that they want more information on the pace of growth in the current second quarter before taking action on rates.
Tame inflation also may help stay the Fed's hand. The so-called PCE price index, which Greenspan tracks closely, edged up a mere 0.6 percent in the first quarter. Stripping out volatile food and energy prices, it rose just 0.8 percent.