Economy Grows at Sizzling 5.8 Percent Rate
By John M. Berry
Washington Post Staff Writer
Friday, April 26, 2002; 12:43 PM
Shrugging off the effects of last year's brief recession, the U.S. economy roared ahead in the first three months of the year, propelled by increases in consumer and government spending and a big swing in business inventories, the Commerce Department reported today.
The economy grew at an inflation-adjusted 5.8 percent annual rate, the best performance in more than two years. Forecasters are now predicting a somewhat more modest gain of 3 percent to 4 percent in the current quarter.
In the first half of last year, the economy turned flat and then contracted at a 1.3 percent annual rate in the third quarter, largely as a result of the shock to economic activity from the terrorist attacks on the World Trade Center and the Pentagon on Sept. 11. A huge increase in new car sales, triggered by offers from automakers of zero percent financing, helped the economy to begin growing again late in the year, but at only a 1.7 percent pace.
"The lights turned on in the U.S. economy in the first quarter," said economist Steven Wieting of Salomon Smith Barney in New York. "However, this was just a first step ahead after a nearly two-year [economic] malaise."
Even with the big number reported today, the gross domestic product--a measure of all the goods and services produced in the United States--was only 1.6 percent higher than it was in the first quarter of last year, Wieting noted.
As growth slowed and then turned negative last year, the nation's unemployment rate rose from an extraordinarily low 3.9 percent in the fall of 2000 to 5.8 percent last December. Many firms have managed to increase production, either by having their employees work more hours each week or though productivity gains, and the rebound in economic growth so far has had little impact on the jobless rate, which remained at 5.7 percent last month.
That rate could stay relatively high if the rapid growth of productivity--the amount of goods and services produced for each hour worked--continues. That is, production could grow for some time without employers having to expand their work forces. And that could particularly be true if the economy grows at no more than a 3 percent pace, which some analysts expect.
Bill Cheney, chief economist for John Hancock Financial Services in Boston, said he is "expecting a very healthy, if unexciting, growth rate of 3 percent through the rest of the year. The recession was mild, the recovery will be too. No big bust, no big boom."
Earlier this year, Federal Reserve officials said that if the economy expands at a 2.5 percent to 3 percent annual rate over the course of this year, the unemployment rate is likely to rise to 6 percent or slightly more by late this year.
Fed officials, including Chairman Alan Greenspan, have signaled that they will hold off on raising their extremely low target for short-term interest rates until the economy's growth prospects are clearer. They feel free to hold off on rate increases even though the recession obviously is over because they expect inflation to remain quite low.
That view got some support in today's report. Commerce said that the price index for personal consumption expenditures, a broader measure than the consumer price index, rose at only a 0.6 percent annual rate in the first quarter.
The biggest single factor in boosting growth this year was the swing in inventories. Businesses began to cut production in mid-2000 in order to reduce their growing stocks of unsold goods. For six consecutive quarters, the rate at which inventories were reduced accelerated until the last three months of 2001, when the rate of liquidation reached a record $119.3 billion. In each of those six quarters, inventories were a drag on growth because of the production cuts behind the liquidation.
Actually, inventories declined further in the first quarter, but at only a $36.2 billion annual rate. Given the production increases required to slow the rate of liquidation, that swing in inventories accounted for 3.1 percentage points of the 5.8 percent rise in GDP.
Many analysts had expected an even greater contribution from inventories to first quarter growth. But in a sense, the actual numbers were good news in that as production continues to increase to halt the continuing decline in unsold goods, it will give the economy an added boost in the current quarter and perhaps beyond, analysts said.
As expected, consumer spending on durable goods declined in the first quarter following the surge in motor vehicle purchases late last year. But the drop was smaller than had been feared, and it was more than offset by increases in purchases of nondurable goods and services.
Government spending rose at a 7.9 percent annual rate, partly due to a 12.4 percent rise in defense spending related to the war on terrorism and the fighting in Afghanistan. In was the second consecutive double-digit increase in defense spending. Investment in housing also was a plus, rising at a 15.7 percent annual rate.
In contrast, international trade was a negative. Both exports and imports rose in the quarter, but imports, which provide goods and services that might otherwise be produced in this country, increased more than exports.
Finally, business spending on new equipment and software declined at only a 0.5 percent annual rate, the smallest drop since the fall of 2000. Many analysts predict that type of investment will begin to grow in the current quarter, but it remains uncertain how fast is may rise in the second half of the year. Meanwhile, business spending for new plants, office buildings and other structures fell significantly for the fourth quarter in a row.
© 2002 The Washington Post Company
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