Economic Growth Rushes Past Predictions

The U.S. economy barreled ahead at a faster-than-expected speed during the first quarter, the government said Friday, days before the Federal Reserve was expected to boost interest rates to brake the growth rate.

In a revised estimate of first-quarter performance, the Commerce Department said gross domestic product expanded at a 4.3% annual rate instead of 4.1% as trade became less of a drag and exports improved.

Companies posted their heartiest gain in profits in four years, while prices also advanced a little more briskly than previously thought. Gross domestic product measures total goods and services production within the United States, making it the broadest gauge of national economic activity.

Though down from a roaring 6% rate of growth in the fourth quarter, the revised first-quarter GDP expansion remained well above levels that the Federal Reserve considers safely sustainable without risking a flare-up in wages and prices.

The Fed’s policy-setting Federal Open Market Committee is set to meet June 29-30 and is expected to announce a rise in interest rates at its conclusion to keep a damper on future inflation.

The key reason cited by the government for revising its estimate of first-quarter GDP growth was a narrowing in the trade deficit, as exports were revised up and imports were revised down. A brightening economic picture in Asia has improved overseas sales opportunities and stimulated a pickup in U.S. manufacturing activity.

Prices also advanced at a slightly stronger rate in the first quarter than previously thought, the GDP report showed, as the economy headed into its ninth straight year of growth at the end of the period.

One price gauge in the GDP report, the implicit price deflator, rose at a 1.6% annual rate--double the 0.8% rise in the fourth quarter and up from the 1.5% estimated a month ago. It was the strongest growth in prices since the second quarter of 1997, when they increased 1.7%.

Lynn Reaser, an economist with Bank of America Private Bank in Jacksonville, Fla., said she calculated growth in the second quarter ending June 30 at “close to 4%” and added she expected a quarter percentage point rise in short-term interest rates next week.

There were tentative signs of slowing, though, as long-term interest rates move up and mortgage rates grow more costly. That should brake GDP growth in the second half to an annual rate nearer 3%.

“In both auto sales and housing markets, I believe we’re seeing the peaking of a cycle,” Reaser said.

The Commerce Department said consumer spending on goods and services grew by 6.7% in the first quarter instead of 6.8% as it estimated a month ago.

That was up from a 5% increase in the previous quarter, for the fastest quarterly pickup in 11 years.

Company profits after taxes fattened at a 6.2% rate to a seasonally adjusted $501.9 billion in the first three months this year, a sharp turnaround from last year’s fourth quarter when profits shrank by 1% as tobacco companies paid money to settle lawsuits.

Commerce said the increase in profits was the highest for any quarter since a 7.9% increase in the first three months of 1995.