First-Quarter Growth Seen at a 4.5% Rate: U.S. Economy Preview
May 23 (Bloomberg) -- The U.S. economy may have expanded at a 4.5 percent annual pace in the first quarter, bolstered by demand that's enabling companies to raise prices, sweeten profits and hire more workers, economists said in advance of a government report due Thursday.
The rate of increase in gross domestic product, the sum of all goods and services produced in the U.S., is faster than the 4.2 percent the Commerce Department reported last month. The revisions were due to increased construction spending and inventory building, economists said. The median forecast in the Bloomberg News survey also shows an acceleration from 4.1 percent in the final three months of 2003.
A measure of inflation tied to the report probably grew the most since the second quarter of 2001. Companies are enjoying increased earnings as they gain pricing power. Profits for companies in the Standard & Poor's 500 Index are expected to increase 17.4 percent this year, which would be the best annual showing since 1999, according to Thomson Financial.
``Profit growth has set the stage for business investment and hiring,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. Economic growth is going to be ``quite strong'' for the rest of the year, he said.
As companies spend more to upgrade facilities, factories are producing more equipment. A measure of Chicago-area business in May probably stayed close to what was almost a 10-year high reached in January.
`Broad Confidence to Invest'
The National Association of Purchasing Management-Chicago is expected on Friday to report a reading of 62 in its May gauge compared with 63.9 a month earlier, according to the median forecast in a Bloomberg survey. In January, the index rose to 65.9, the highest since July 1994.
Applied Materials Inc.'s chief executive, Michael Splinter, said in an interview last week his customers are experiencing strong sales. The Santa Clara, California, manufacturer is the world's biggest maker of equipment to produce semiconductors.
``Our customers have broad confidence to invest in capacity right now,'' Splinter said. ``We don't see this waning in the short term.''
The labor market is also being bolstered by growth in the economy and corporate earnings. A report Thursday from the Labor Department may show that initial claims for unemployment insurance fell to 335,000 last week from 345,000. Job growth in the last two months was the strongest since 2000.
Consumer Attitudes
``We're going to open about 90 net new stores this year,'' Philip Francis, chief executive of Petsmart Inc., said in an interview last week. ``We are certainly in the hiring mode.'' The Phoenix-based company, the largest U.S. retailer of pet supplies, may hire about 5,000 people this year, he said. Petsmart said that its first-quarter profit jumped 46 percent, helped by higher sales of pet services such as grooming.
Such hiring is helping shore up consumer confidence, a report Tuesday from the New York-based Conference Board may show. A measure of May sentiment probably increased to 94.0 from 92.9 in April and the second-highest reading this year, according to the median forecast in a Bloomberg survey.
Higher fuel prices and the war in Iraq are restraining confidence, economists said.
Federal Reserve policy makers are taking notice of the increases in the costs of fuel and other goods and services. Fed Governor Ben Bernanke said last week that ``the flare-up in inflation in the first quarter is a matter for concern.''
The Fed has left its overnight lending rate at 1 percent since last June, meaning that in inflation-adjusted terms interest rates are negative, a posture that may eventually lead to higher inflation as consumers are encouraged to spend.
Watching Inflation
The Fed's Open Market Committee, which sets rate policy, said in a statement May 4 that it ``believes that policy accommodation can be removed at a pace that is likely to be measured.'' Bernanke's comments suggest that the pace of rate increases by the U.S. central bank could be altered with new data on inflation.
Some other Fed officials in recent days have suggested that gains in inflation must be watched carefully.
``You've got to be concerned when the numbers start showing some inflation,'' Robert McTeer, president of the Dallas Fed, said last week in Houston.
While the Fed has kept its benchmark rate at the lowest in 46 years, market-based borrowing costs have started to increase. The average rate on a 30-year fixed mortgage last week was 6.3 percent, close to an eight-month high, according to Freddie Mac, the No. 2 buyer of mortgages.
Home Sales
Sales of new and previously owned homes probably held close to record levels in April, according to the median forecasts in a Bloomberg survey. On Tuesday, the National Association of Realtors may report sales of previously owned houses at a 6.45 million annual rate last month, close to the all-time high of 6.68 million in September.
``We've seen mortgage rates go up 107 basis points over the last year,'' Ara Hovnanian, chief executive officer at homebuilder Hovnanian Enterprises Inc. in Red Bank, New Jersey, said in an interview last week. ``Our sales are as solid and steady as ever.''
The Commerce Department on Wednesday may report an annual rate of 1.2 million new homes sold last month after a record pace of 1.228 million.
``Higher mortgage rates will eventually dampen home sales but probably not for another three to six months,'' said Steven A. Wood, chief economist at Insight Economics in Danville, California.
On Friday, the Commerce Department is forecast to report that personal income increased 0.5 percent in April after a 0.4 percent rise. Consumer spending is estimated to have increased 0.2 percent after a 0.4 percent gain.
Bloomberg Survey
Date Time Period Indicator BN Survey Prior
05/25 10:00 May Confidence-Conf. Board 94.0 92.9
05/25 10:00 April Home Resales 6.45M 6.48M
05/26 8:30 April Durable Goods Orders -0.8% 5.0%
05/26 10:00 April New Home Sales 1200K 1228K
05/27 8:30 5/22 Initial Jobless Claims 335K 345K
05/27 8:30 5/15 Continuing Claims 2920K 2943K
05/27 8:30 1Q P GDP Price Deflator 2.5% 2.5%
05/27 8:30 1Q P Gross Domestic Product 4.5% 4.2%
05/28 8:30 April Personal Income 0.5% 0.4%
05/28 8:30 April Personal Spending 0.2% 0.4%
05/28 10:00 May Chicago Purchasers 62.0 63.9
05/28 10:00 May F Confidence- U. of MI 94.2 94.2
To contact the reporter on this story:
Vince Golle in Washington vgolle@bloomberg.net.
To contact the editor responsible for this story:
Kevin Miller at kmiller@bloomberg.net.
Last Updated: May 23, 2004 09:07 EDT
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