Economy up 5.6 percent in first quarter, most in 2 years

By Jeannine Aversa

Associated Press

WASHINGTON — The economy snapped back from last year’s recession, growing at an annual rate of 5.6 percent in the first quarter, the strongest performance in nearly two years.

The latest reading on the first-quarter gross domestic product – which measures the total output of goods and services produced within the United States – showed the economy grew a little less briskly than the 5.8 percent rate estimated a month ago, the Commerce Department reported Friday.

Even so, the revised January-March performance was remarkable given the economy actually shrank at a 1.3 percent rate in the third quarter of 2001. GDP grew at a below-par 1.7 percent rate in the fourth quarter.

“The economy is on the mend, but it needs more time to heal,” said Mark Vitner, senior economist at Wachovia Securities.

In another Commerce report, new-home sales rose solidly in April, providing support for the recovery.

New-home sales went up 1 percent last month to a seasonally adjusted annual rate of 915,000 as low mortgage rates and solid housing appreciation motivated buyers. In March, sales fell 3 percent.

Although the economic recovery is clearly chugging ahead, many economists have mixed thoughts on how it will ultimately shape up, with predictions ranging from sluggish to solid, but probably not sizzling.

On Wall Street, stocks slumped. The Dow Jones industrial average was off 74 points and the Nasdaq index was down 31 in morning trading.

President Bush has credited his $1.35 trillion tax cut package enacted last year with helping to pull the economy out of recession. He wants to make sure the recovery stays on firm footing.

So does the Federal Reserve. Citing uncertainties about the vitality of the recovery, the Fed earlier this month decided to leave short-term interest rates unchanged at 40-year lows. Vitner predicts the Fed will continue to hold rates steady through the summer.

Low interest rates should motivate consumers to continue buying – and for businesses to step up investment, which would help the economic recovery. Consumer spending accounts for two-thirds of all economic activity.

Federal Reserve Chairman Alan Greenspan has warned that the recovery could be less than sizzling because consumers, who kept buying throughout the slump, might not have a lot of pent-up demand coming out of it.

Many economists believe economic growth slowed in the current quarter to between 3 percent and 3.5 percent – still considered a respectable pace.

Another factor that could affect consumer behavior is the job market. The nation’s unemployment rate is at a nearly eight-year high of 6 percent and is expected to rise to around 6.5 percent this summer. That’s because analysts believe companies will be slow to hire back workers until the recovery is assured.

One of the reasons the first-quarter GDP was revised down a bit from the previous estimate is because consumer spending was slightly less brisk. Consumer spending grew at a rate of 3.2 percent, down from 3.5 percent previously reported.

Spending by businesses on new plants and equipment also was weaker, contributing to the lower GDP estimate. Businesses cut this spending at an 8.2 percent rate, deeper than the 5.7 percent decline previously estimated. Capital investment has dropped for five straight quarters, a key behind the economy’s plunge into recession.

Economists said a vital ingredient to a solid and sustained economic recovery is a turnaround in capital spending.

One of the biggest sources of strength in the first quarter came from a slowdown in inventory liquidation by businesses. That added a sizable 3.47 percentage points to the GDP.

Another big boost come from a whopping 18.3 percent growth rate in federal government spending on national defense. That marked the biggest increase since the first quarter of 1967.

Friday’s report also showed the after-tax profits of U.S. corporations edged up 0.9 percent in the first quarter, the first increase since the third quarter of 2000.

The 5.6 percent growth rate in GDP marked the fastest pace since the second quarter of 2000.

Based on the current GDP data, the drop in economic output during the recession was a small 0.3 percent, which would be the mildest recession on record. That record has been held by the 1969-1970 recession, when GDP fell 0.6 percent.