U.S. Economy Roars Into 1999 On Spending Surge
By Glenn Somerville
WASHINGTON (Reuters) - The booming U.S. economy roared into 1999 on a wave of consumer spending, the government said Friday, heightening fears in financial markets that the Federal Reserve could raise interest rates.
Gross domestic product, the broadest measure of goods and services output within U.S. borders, climbed at a 4.5 percent annual rate in the three months from January through March, down moderately from a sizzling 6.0 percent in the fourth quarter last year, the Commerce Department said.
That handily outpaced Wall Street economists' forecasts for a 3.3 percent rate of first-quarter growth.
Consumers drained savings to boost spending at a 6.7 percent annual rate in the first quarter -- the strongest advance in personal consumption spending since 1988 and up from a 5 percent increase in the fourth quarter of last year.
Analysts said the unexpectedly vigorous first-quarter advance was likely to make Federal Reserve policymakers uneasy about the risks of inflation.
''Will this be enough to induce the (U.S. Federal Reserve) to raise interest rates now? I don't think so,'' said economist Kathryn Kobe of advisory firm Joel Popkin and Co. ''But the concern is this rate of growth will leave us vulnerable to more inflation later on.''
Bond prices plummeted a half point after the report was released as traders reacted to the possibility that the first-quarter growth numbers could prompt an interest rate increase.
''We were hoping for something more like 3.3 or 3.6 percent,'' said Michael Franzese, a bond trader with Zions Bank in Jersey City, N.J. ''At 4.5 (percent) they realize (Federal Reserve Chairman Alan) Greenspan may have to react with a tightening sometime in August to October.''
The department said personal savings -- measured as the proportion of earnings devoted to bank accounts and other savings -- shrank at a 0.5 percent rate or by $30.9 billion in the first quarter after being flat in the fourth quarter. It was the weakest performance for the quarterly savings rate since the government began compiling the figure in 1946 and meant consumers were borrowing heavily to keep shopping.
The strong GDP report pushed the value of the dollar sharply higher against the struggling euro currency on the latest evidence that the United States continues to outperform economies in continental Europe comfortably.
The euro, which was launched in January, fell to a lifetime low of $1.0557 in early U.S. trade.
Were it not for the drag on the economy from a weak international sector, GDP would have grown at an explosive rate of nearly seven percent. Trade was one of the few restraints on first-quarter growth as exports faltered and imports from hard-hit economies in Asia and Latin America swelled.
Prices picked up in the first quarter, as the GDP price index accelerated to a 1.4 percent gain from 0.8 percent rise in the closing quarter last year. It was the strongest increase in nearly two years since a 1.7 percent gain in the second quarter of 1997.
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