Economy Carries Momentum into Spring

The national economy carried its strong momentum into the second quarter as factories cranked up activity, builders boosted construction spending to a record high and consumers opened their pocketbooks ever wider.

But inflation picked up, too.

The information was contained in a trio of economic reports released Monday.

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"Households and corporations are still very active and are creating economic momentum, which is tremendously encouraging news for the economy," said Carl Tannenbaum, chief economist at LaSalle Bank. "The only dark cloud comes from the news on prices, which are going up."

A report from the Institute for Supply Management showed manufacturing activity grew briskly in April. The group's manufacturing index jumped to 57.3 in April, from 55.2 in March, the strongest showing in six months.

The report also showed the prices are rising not only for energy but also for other commodities, such as aluminum and copper.

"The indicators of prices ... are beginning to point more clearly toward inflation pressures," said Stephen Stanley, chief economist at RBS Greenwich Capital.

In a second report, the Commerce Department said total construction spending in March climbed to $1.199 trillion, on an annualized basis, surpassing the previous record high set in February. That marked a 0.9 percent increase.

Private builders ramped up spending on a wide variety of projects in March, including residential construction and factories. The government also spent more on big public works projects, including power plants.

"The construction engine was firing on all cylinders," said Ken Simonson, chief economist of The Associated General Contractors of America.

In another report from the department, consumer spending rose 0.6 percent in March, an improvement from February's 0.2 percent increase. Consumer spending plays a key role in shaping overall economic activity.

Incomes, the fuel for future spending, advanced 0.8 percent in March. That was up from a 0.3 percent increase in February and was the largest gain since September.

Income includes government payments as well as wages. Payments from the new Medicare prescription drug plan had the effect of helping to boost overall income in March. Wages, meanwhile, grew by a moderate 0.4 percent for the second month in a row.

The spending and income figures are not adjusted for inflation.

When adjusted for inflation, consumer spending looked more subdued, rising by 0.2 percent in both February and March.

An inflation gauge tied to the consumer report revealed inflation accelerated.

The measure showed that prices — excluding energy and food — went up 0.3 percent in March, compared with a tiny 0.1 percent increase in February. Over the last 12 months, these "core" prices rose by 2 percent — considered the upper bound of the Fed's comfort zone for inflation.

The inflation reading didn't include the big run-up in oil prices seen two weeks ago. At that time, oil prices topped $75 a barrel, a record high. Prices have retreated a bit since them.

To fend off inflation, the Fed is expected to boost a key interest rate to 5 percent at its May 10 meeting.

After May, some economists believe the Fed will move to the sidelines for a while to assess how its rate increases are affecting economic activity. Others, however, predict the Fed will be forced to push up its key rate to 5.50 percent in the months ahead to prevent inflation from taking off.

Thus far, the economy is motoring ahead despite rising interest rates and energy prices.

For the first quarter, the economy grew at a 4.8 percent pace, the fastest in 2 1/2 years, the government reported last week. A big pickup in consumer spending figured prominently in the strong showing. The first quarter's performance was a vast improvement over the feeble 1.7 percent growth rate seen in the final quarter of 2005.

In the current April-to-June quarter, economic growth is expected to slow to the 3 percent range, which would still be healthy, as consumers moderate their spending.

All three economic reports released Monday showed stronger economic activity than analysts were forecasting. That along with the inflation pickup "are issues the Fed will have to deal with," Tannenbaum said.

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