Economy Grows at 5.5 Percent Rate

Thursday, June 29th 2000, 12:00 am
By: News On 6

WASHINGTON (AP) — The U.S. economy grew robustly in the first three months of this year, while a key inflation measure took its biggest leap since late 1994, largely reflecting surging energy prices.

The country's total output of goods and services, called the gross domestic product, rose at an annual rate of 5.5 percent during the January-March quarter, the Commerce Department said Thursday.

That was slightly faster than the government's two previous estimates of first-quarter GDP, which both clocked in at a 5.4 percent rate. But it was slower than the 7.3 percent growth rate in the fourth quarter of 1999.

Meanwhile, an inflation gauge tied to the GDP — and one watched closely by Fed Chairman Alan Greenspan — rose at an annual rate of 3.5 percent in the first quarter, up from 2.5 percent in the fourth quarter. Higher energy prices accounted for most of the first-quarter gain.

That was the biggest increase since 3.5 percent in the third quarter of 1994. The 3.5 percent first-quarter increase hasn't been exceeded since a 3.6 percent gain in the first quarter of 1992.

On Wall Street, investors' worries about higher interest rates sent the Dow Jones down 105 points in afternoon trading.

Economists offered mixed opinions on whether the inflation data was worrisome.

``I don't think 3.5 percent is really the peak,'' said Sung Won Sohn, chief economist for Wells Fargo. ``I think inflation is likely to higher because energy prices are increasing and those higher costs will be cascading throughout the economy raising prices of everything from airfares to garbage can liners.''

But William Cheney, chief economist at John Hancock, was less troubled. Excluding energy and food, the inflation measure rose just 2.2 percent, suggesting that most other prices were in check, he said.

One thing economists agreed on is that the economy may have slowed in the current second quarter to a rate of 4 percent or less, reflecting interest rate boosts by the Federal Reserve.

Two other reports Thursday appeared to bolster that case.

New homes sales fell 0.2 percent in May to an annual rate of 875,000, the lowest level in eight months. That came on the heels of an 8.6 percent drop in April.

And, new claims for unemployment benefits rose unexpectedly last week by 2,000 to 306,000, suggesting that the red-hot labor market may be cooling.

The Fed has raised interest rates six times over the past 12 months in an effort to slow the economy and keep inflation under control. The Fed, amid signs of a slowing, decided Wednesday not to boost rates for a seventh time, but left the door open should inflation worsen.

Some analysts believe the Fed may push rates higher at its Aug. 22 meeting. Economists didn't believe Thursday's GDP report would play an important role in that decision. The Fed is likely to put more stock into forward-looking economic data coming out in the next couple of months, they said.

Brisk spending by consumers helped boost first-quarter economic growth, while the trade deficit and slower buildup of business inventories subtracted from it.

Consumer spending — which accounts for two-thirds of all economic activity — grew at a 7.7 percent rate in the first quarter, the strongest since the second quarter of 1983, and up from a 5.9 percent rate in the fourth quarter.

Businesses boosted investment in new equipment and plants in the first quarter by a rate of 23.7 percent, compared with the 2.9 percent rate of increase in the fourth quarter.

But the U.S. trade deficit continued to shave growth.

Imports rose at an 11.7 percent rate, up from an 8.7 percent rate in the fourth quarter, while exports grew at a 6.2 percent rate, down from a 10.1 percent rate.

Meanwhile, businesses increased their inventories $28 billion in the first quarter, down from $66.7 billion in the fourth quarter.

The GDP report also showed that after-tax profits of U.S. corporations grew by 5.8 percent in the first quarter, up from a 2.7 percent increase in the fourth quarter. Economists attributed the improvement to healthy productivity gains.

In another report, the net foreign debt of the United States last year shrank by $29.3 billion to $1.08 trillion even as foreign investors plowed record amounts of money into U.S. securities. Net foreign debt is the gap between what foreigners have invested in the U.S. and what Americans have invested abroad.