May 27, 1999
GDP Growing at 4.1 Percent Rate
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Filed at 5:30 p.m. EDT
By The Associated Press
WASHINGTON (AP) -- The biggest consumer spending
spree in 11 years kept the economy growing at a robust rate
in the year's first quarter, the government said today. But
financial markets took a nosedive on investor worries that
the fast growth would trigger higher inflation.
The economy grew at a solid annual rate of 4.1 percent,
even though the country's trade deficit was a bigger drag on
growth than previously thought, the Commerce Department
said.
The government's new figure for gross domestic product --
the broadest measure of economic health -- represented a
slight downward revision from a 4.5 percent figure released a
month ago.
But the new figure still showed a remarkably strong
economy, now in its longest peacetime expansion. The GDP
report also showed that corporate profits, which had been in
the doldrums, had a sizable rebound for the first quarter.
''The economy is healthy, inflation is largely absent and
earnings are picking up. Not a bad combination,'' Merrill
Lynch economist Bruce Steinberg said.
Consumer spending, which powered the 4.1 percent
increase, grew at an annual rate of 6.8 percent -- the fastest
increase since early 1988. That was even better than the
original estimate of a 6.7 percent increase in consumer
spending, which accounts for two-thirds of total economic
activity.
An inflation gauge tied to the GDP rose 1.1 percent in the
first quarter, showing price pressures remained well
contained.
But financial markets, which have grown increasingly
nervous about inflation, were not impressed with the figure.
The Dow Jones industrial average closed down 235.23
points to close at 10,466.93 -- the biggest point drop since
last September -- though the 2.2 percent decline was not
among the largest historically in percentage terms.
Investors were focused on the fact that economic growth
remains well above the comfort level of the Federal Reserve,
which only a week ago indicated it is edging closer to raising
interest rates because of worries the economy is growing too
fast.
''The bottom line is that the Fed probably would view this as
still excessive growth,'' said economist David Jones of
Aubrey G. Lanston & Co.
Many analysts believe that the central bank could start
raising interest rates as soon as its next meeting June 29-30 if
inflation pressures appear to be mounting.
In the January-March quarter, economic growth was
reduced by 2.53 percentage points by record trade deficits
tied to the global financial crisis that has pushed one-third of
the world into recession. That, in turn, has cut sharply into
American export sales and generated a flood of cheaper
imports in the United States.
In addition to the wider trade deficit in the revised figures,
the government said the GDP dropped from its estimate of a
month ago because businesses were not building up
inventories as fast as originally thought.
Steinberg said the lower inventories will bolster growth
above what had been expected in the current quarter because
businesses will not have to cut back production to work off
unwanted stockpiles.
He predicted the GDP would expand at an annual rate of 3.5
percent in the April-June period, down only slightly from the
first quarter rate.
The 4.1 percent growth rate in the first quarter was even
faster than the 3.9 GDP increase for all of 1998. The GDP
expanded 6 percent in the final three months of last year.
''The (GDP first quarter) revision was small and still signals
a very booming U.S. economy and a lopsided pattern of
spending -- a consumer boom and a trade bust,'' said Allen
Sinai, economist with Primark Decision Economics.
Corporate profits for the first quarter increased at an annual
rate of $31.8 billion -- the biggest annualized increase in two
years. Corporate profits had fallen $5.3 billion in the fourth
quarter.
The rebound was attributed to lower payments tobacco
companies had to make on out-of-court settlements. Those
settlements had subtracted $13.5 billion from fourth quarter
profits and only $900 million in the first quarter.
In a separate report, the Labor Department said the number
of Americans filing new claims for unemployment benefits
was unchanged last week at 300,000. New claims have been
at or below the 300,000-person market for 12 of the last 21
weeks, a sign of the best job market conditions in three
decades.
In addition to consumer spending, first-quarter growth was
bolstered by a 10 percent increase in business investment
and a 15.4 percent rise in housing construction, enjoying a
boom because of low mortgage rates and record high levels
of consumer confidence.
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