U.S. Economy Surged In the First Quarter
By John M. Berry
Washington Post Staff Writer
Saturday, April 27, 2002; Page A01
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 in part by low interest rates and tax cuts.
Increases in consumer and government spending and a big swing in business inventories boosted economic growth to an inflation-adjusted 5.8 percent annual rate in the first quarter, the best performance in more than two years, the Commerce Department reported yesterday.
However, recent data also show that the pace of the recovery has slowed since then, and forecasters are now predicting the economy will grow at a more modest 3 percent to 3.5 percent annual rate for the remainder of the year. And some analysts cautioned that such a level of growth might do little to reverse the rise in unemployment caused by the recession.
The economy stalled in the first part of 2001 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 Sept. 11 terrorist attacks. A huge increase in new-car sales, triggered by automakers' offers of interest-free financing, helped the economy begin growing again late in the year, but at only a sluggish 1.7 percent annual rate.
"The lights turned on in the U.S. economy in the first quarter," said economist Steven Wieting of Salomon Smith Barney Inc. in New York. "However, this was just a first step ahead after a nearly two-year [economic] malaise."
But in recent weeks numerous analysts have pointed to a variety of new economic figures, including lackluster new orders for durable goods, continuing claims for unemployment benefits and relatively weak hiring, as signs that growth is slowing again.
Another less positive sign was the announcement yesterday by the University of Michigan that its consumer sentiment index fell to 93 from 95.7 last month. "The April loss reflected a reassessment by consumers of prospects for the national economy. While consumers did not anticipate as fast a pace of economic recovery as last month, most consumers still expected improving economic conditions," a university analyst said.
The nation's unemployment rate rose from an extraordinarily low 3.9 percent in the fall of 2000 to 5.8 percent last December. Since then many firms have managed to increase production, either by having their employees work more hours each week or though gains in productivity, the amount of goods and services produced for each hour worked. As a result, the rebound in economic growth has had little impact on the jobless rate, which remained at 5.7 percent last month.
Moreover, the unemployment rate could stay high if the rapid growth of productivity continues. That is, production could grow for some time without employers having to expand their workforces, particularly if the economy grows at no more than a 3.5 percent annual rate, as many analysts expect.
Bill Cheney, chief economist at John Hancock Financial Services Inc. in Boston, said yesterday that 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 Board officials said that if the economy expands at a 2.5 percent to 3 percent annual rate over the course of this year, which they were predicting at the time, 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 not raise their target for short-term interest rates, which they lowered 11 times last year to combat the recession, until the economy's growth prospects become less uncertain. They feel free to hold off on rate increases because they expect inflation to remain low.
That view got some support in yesterday's report. Commerce said 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 to reduce their growing stocks of unsold goods, and they continued doing so through the end of last year. During that time, the production cuts were a big drag on growth.
Inventories declined further in the first quarter but at a much slower rate. The production increases required to slow the liquidation rate accounted for 3.1 percentage points of the 5.8 percent rise in first-quarter gross domestic product.
President Bush, speaking to reporters at his ranch in Crawford, Tex., said he and his economic team agreed that the swing in inventories was a big factor in the first-quarter growth spurt.
"This means that the impetus behind growth won't last very long, that we must continue working to make sure the short-term recovery is a long-term recovery," Bush said.
Later, in Washington, White House economist R. Glenn Hubbard told reporters the key to that long-term recovery is "a sustained turnaround in business investment," which he expects to take hold in the second half of the year.
In the first quarter, Hubbard said, business spending on new equipment and software was "essentially flat" after declining for more than a year, so the turnaround has begun. Meanwhile, business spending for new plants, office buildings and other structures fell significantly for the fourth quarter in a row.
As businesses continue to boost production to stabilize their inventories, they will add to economic growth 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 other goods and services.
Government spending rose at a 7.9 percent annual rate, partly due to a 12.4 percent increase in defense spending related to the war on terrorism. In was the second consecutive double-digit increase in defense spending. Investment in housing also rose, at a 15.7 percent annual rate.
© 2002 The Washington Post Company
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