Economy soars by 5.8 percent rate in first quarter, best showing since late 1999

<br>WASHINGTON (AP)_ The economy, knocked down by last year&#39;s recession and terror attacks, rocketed back in the first quarter at an annual growth rate of 5.8 percent. <br><br>After limping through

Friday, April 26th 2002, 12:00 am

By: News On 6



WASHINGTON (AP)_ The economy, knocked down by last year's recession and terror attacks, rocketed back in the first quarter at an annual growth rate of 5.8 percent.

After limping through the last six quarters, gross domestic product _ the broadest measure of the economy's health _ posted its strongest showing since the final quarter of 1999, the Commerce Department reported Friday.

The latest GDP report reinforced the view that the country not only emerged from a recession that began in March 2001 but that the downturn will probably go down as the mildest in U.S. history.

That would be welcome news to President Bush who wants credit for steering the economy out of recession.

The economy's sizzling first-quarter performance is especially remarkable given that the GDP actually shrank at a 1.3 percent rate in the third quarter of 2001. The GDP registered a below-par rate of 1.7 percent in the fourth quarter.

``Growth is back! The recession is over!'' declared Ken Mayland, president of ClearView Economic. ``This economy is getting back on a good growth track, which down the road will mean good things for the restoration of jobs and companies' profits.''

A big factor in the economy's stellar first-quarter expansion was a slowdown in inventory liquidation by businesses. That added a hefty 3.10 percentage points to the GDP, its largest contribution since the fourth quarter of 1987.

During the slump, businesses sharply cut production and discounted merchandise in order to get rid of stockpiles of unsold goods. That was a key source of weakness for the economy and a huge drag on the GDP in the fourth quarter.

Nonetheless, economists said it was crucial for businesses to unload excess supplies in order to set the stage for ramped-up production by manufacturers down the road, which would add to economic growth.

Because the burst provided by the inventory situation in the first quarter is fleeting, many economists estimate the GDP, which measures the total output of goods and services produced within the United States, has slowed in the current quarter to a growth rate of around 3 percent to 3.5 percent. But that would still be considered a respectably brisk pace.

Federal Reserve Chairman Alan Greenspan told Congress earlier this month that the economy's outlook is looking brighter and that the central bank is in no rush to boost short-term interest rates, now at 40-year lows.

The Fed's 11 rate cuts last year and President Bush's $1.35 trillion tax-cut package helped the economy come out of the slump, economists say.

Greenspan estimated the recovery would unfold like a two-stage rocket, with the first stage supplying the initial liftoff in the first quarter of this year with a big swing in inventory restocking by companies. For the rebound to be sustained, he said, it would have to be followed by a second stage of business and consumer spending.

Most economists don't foresee a ``double-dip recession,'' in which the economy slips into reverse. But they question how much of an appetite consumers _ who were buying through the recession _ will have to spend coming out of it. And, they wonder when business investment will turn around, a necessity for a solid economic rebound.

In the first quarter, consumers, who account for two-thirds of all economic activity in the United States, increased spending at a rate of healthy rate of 3.5 percent, another factor lifting the GDP. But that was a big slowdown from the red-hot 6.1 percent growth in spending in the previous quarter.

Also boosting economic growth in the first quarter was a 15.7 percent rate of increase in spending on residential projects, the biggest gain since the second quarter of 1996. Low interest rates and mild weather in the first quarter powered home sales.

However, businesses in the first quarter continued to cut investment in new plants and equipment, a leading source of weakness for the economy. Still, the 5.7 percent rate of decline in such capital spending was not nearly as deep as the 13.8 percent cut in the fourth quarter. Capital spending has fallen for the last five quarters.

The trade deficit was another weak spot. The deficit shaved 1.22 percentage points off first-quarter GDP as the improving U.S. economy lifted Americans' demand for foreign-made goods. That compared with a reduction of 0.14 percentage point in the fourth quarter.

An inflation gauge tied to the GDP rose at a rate of 0.6 percent in the first quarter, down from an 0.8 percent increase in the previous quarter.

Greenspan earlier this month said the Fed has the luxury of delaying an interest-rate decision to see how events unfold because, except for a jump in energy prices, inflation remains under control. There will be ample opportunity later to adjust interest-rate policy to fight inflation if necessary, he said.
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