Economy grows at 4.2 percent rate in first quarter

WASHINGTON – The economy grew at an annual rate of 4.2 percent in the opening quarter of 2004, a solid showing and fresh evidence that the business recovery is solidly on track. But the performance wasn’t the blowout that some analysts wanted.

The reading on gross domestic product for the January-to-March quarter, reported by the Commerce Department Thursday, marks a slight pickup from the 4.1 percent rate registered in the final quarter of 2003. While the first quarter figure suggests that the recovery is in good shape, it fell short of the strong 5 percent pace that economists were forecasting.

GDP measures the value of goods and services produced within the United States and is considered the most important barometer of the economy’s health.

Economic growth in the first quarter was bolstered by spending by consumers, business and the federal government, especially on defense.

The state of the economy figures prominently in the presidential campaign, where President Bush and presumptive Democratic nominee John Kerry have been facing off over that issue, among many others.

In other economic news, the Labor Department reported that new filings for jobless benefits fell last week by 18,000 to 338,000, another sign that layoffs are easing. Workers’ wages and benefits grew by 1.1 percent in the first quarter, the biggest increase in a year, the department said in a second report.

Economic growth in the current April-to-June quarter is expected to clock in at a rate in the range of 4.5 percent to 5 percent, according to some analysts’ estimates. Growth in the second half of this year, however, may slow a bit to around a 4 percent pace, a still-healthy rate, some economists said. That may occur as the stimulus of tax refunds and tax reductions fades, if energy prices remain high and mortgage rates climb – factors that could slow consumer spending, analysts said.

“Looking forward, the prospects for sustaining solid economic growth in the period ahead are good,” Federal Reserve Chairman Alan Greenspan told Congress last week.

Expectations for such solid economic growth raise hope that the jobs market – the one part of the economy where a full recovery has yet to take place – will continue to show improvements in the months ahead.

After months of sluggish payroll gains, the economy added a hefty 308,000 jobs in March, the most in four years. Economists are hopeful the March employment figures are a sign that the job market is turning a crucial corner. But they said they want to see net payroll gains in the range of at least 150,000 to 200,000 a month on a sustained basis to provide confirmation that the corner has been turned and the labor market is on a real path to full health.

The shape of the economy and the jobs market are important issues in the presidential campaign. Kerry, a senator from Massachusetts, points to the loss of 1.84 million jobs since Bush took office in January 2001 as evidence that the president’s economic policies aren’t working. But Bush says they are, and he wants Congress to make his tax cut permanent, contending that this will make the economy stronger and spur job growth.

Federal Reserve policy-makers are expected to hold a key short-term interest rate at 1 percent, the lowest since 1958, when they meet next Tuesday. Some economists believe the Fed will begin to raise rates in August – before the presidential election. Greenspan last week said that ultra-low rates must rise at some point to keep inflation in check, but he didn’t say when that might happen.

An inflation gauge tied to GDP and favored by Greenspan showed that “core” prices – excluding food and energy – rose by 2 percent in the first quarter, up from a 1.2 percent rise in the previous quarter.

Higher prices, though, didn’t stop consumers.

Their spending in the first quarter grew at an annual rate of 3.8 percent, following a 3.2 percent pace in the fourth quarter. While consumers in the first quarter boosted spending on “nondurables,” such as food and clothes, and on services from the previous quarter, they did cut back spending on big-ticket “durable” goods, such as cars and appliances.

Businesses, meanwhile, increased spending on equipment and software at a 11.5 percent rate in the first quarter, a brisk pace but down from the 14.9 percent growth rate in the fourth quarter. Spending on new plants and other buildings, however, remained weak, falling for the third straight quarter.

Spending by the federal government also contributed to GDP growth in the first quarter, with national defense spending rising at a rate of 15.1 percent, compared with a 3 percent growth rate in the previous quarter. The first quarter figure marked the biggest increase since the second quarter of 2003.

An improved trade picture also helped out economic growth in the first quarter, compared with the drag on GDP that the trade situation had been in the fourth quarter.