Economy Up a Surprising 3% in Quarter : Recovery: Original GDP estimate was 2.6%. Earthquake may have spurred growth as billions were spent to rebuild.

The nation’s economy grew at a much faster rate in the first quarter than government analysts initially thought, as January’s Northridge earthquake and harsh winter weather in the East failed to slow consumer spending, the Commerce Department said Friday.

The report said the economy grew at a 3% annual rate in the first three months of the year, up from the 2.6% rate the agency estimated last month. It raised some analysts’ fears that inflationary pressures are still alive and triggered a sharp rise in bond yields in early trading.

But the yields began declining in the afternoon, after Federal Reserve Board Chairman Alan Greenspan told Congress that he is keeping a close eye on inflation and will not let it surge out of control. The yield on the benchmark 30-year Treasury bond closed at 7.39%, up from 7.35% on Thursday.

Friday’s upward revision in the growth rate of the gross domestic product--which measures the value of goods and services produced in the United States--surprised most economists. They had thought the earlier estimate would instead be lowered as the government gathered more data about business disruptions caused by the earthquake and the East’s rotten weather.

But those same analysts may have failed to consider the positive--if painful--contributions the earthquake made to Southern California’s massive economy, some West Coast analysts said.

Billions of dollars of disaster relief quickly showered down on an army of builders, repair companies and suppliers in the quake’s aftermath, while many homeowners and renters used checks from their insurance companies to buy new furniture and appliances.

“I think some of those East Coast economists were basing a lot of their expectations on the earthquake footage they saw on TV, instead of coming out here and seeing how quickly L.A. was bouncing back from the quake,” said Jack Kyser, chief economist of the Los Angeles Economic Development Corp.

In another report released Friday, the University of Michigan consumer sentiment index rose to 92.8 for May from 92.6 in April, also signaling a healthy economy.

Indeed, the Commerce Department said an uptick in consumer spending--which accounts for two-thirds of all economic activity--was a key reason it raised its first-quarter growth estimate to 3%.

Consumer spending grew at a $39.4 billion annual rate in the first quarter, up sharply from the $32.9-billion rate the Commerce Department had estimated just last month.

However, corporate profits--which soared to a $295.9-billion annual rate in the fourth quarter of 1993--slipped 3.7% to a $284.9-billion rate in the first three months of this year.

The revised 3% annual growth rate is less than half the sizzling 7% logged at the end of 1993.

“Actually, 3% is a pretty nice figure, because we would probably see some inflationary pressures build if the economy grew much faster than that,” said Robert Dederick, chief economist at Northern Trust Co. in Chicago.

The rate should also take pressure off the Federal Reserve Board to hike short-term interest rates again in its ongoing battle to keep the economy from overheating, some economists said.

The Fed has raised its federal funds rate to 4.25% from 3% over the past four months, discouraging businesses from borrowing more money to expand.

“Higher interest rates will bite some in the second half and slow the economy,” said Allen Sinai of Lehman Bros. in New York.

Gross Domestic Product

The GDP measures the value of all goods and services produced in the United States. Percent change from previous quarter:

‘94: +3.0

Source: Commerce Department