Consumer Spending Fuels 5.4% Growth Rate as Inflation Stays Mild
The national economy recorded another impressive performance during the first quarter, expanding at an annual rate of 5.4% while keeping inflation under control, the Commerce Department reported Thursday.
However, the growth rate remains significantly higher than the Federal Reserve Board’s preferred level of economic activity, and many experts expect the Fed to keep boosting interest rates.
With strong consumer spending, and hefty investments by business in computers and other equipment, the economy keeps surging.
The 5.4% growth for the January-through-March period was identical to the preliminary figure issued last month on the basis of partial data. It followed an extraordinary performance during last year’s fourth quarter, when activity surged at a 7.3% annual rate. The two strong quarters demonstrate that the longest economic expansion in U.S. history shows no signs of weakening.
Spending by consumers, which accounts for about two-thirds of all economic activity, rose at an annual rate of 7.5% during the first quarter, up from 5.9% in the final quarter last year, the Commerce Department said. It was the strongest quarterly gain since an identical figure of 7.5% in the third quarter of 1985.
Such robust behavior has fueled the Fed’s concerns about inflation, prompting its half a dozen interest rate hikes since last summer. The Fed worries especially that the “wealth effect”--the combination of money and optimism that comes with a big run-up in the stock market--has driven consumer spending at an excessive pace.
Meanwhile, the Fed appears determined to keep applying the brakes to help slow the economy to a growth rate of 3% to 4%. The most recent interest rate increase, a boost of 1/2 of 1% last week, was the sixth time in a year that the Fed has pushed up the cost of borrowing.
Some argue that the virtual collapse of many technology-related stocks since April may have dampened the wealth effect and discouraged consumers. But that probably wouldn’t be registered in economic statistics for months.
Thus the Fed may be tightening while a slowdown already is underway, said Gordon Richards, chief economist at the National Assn. of Manufacturers.
“A lot of people lost money in the stock market, and that will dampen spending,” Richards said. Consumers already were carrying a heavy load of debt, and now “will have to face the music and rebuild their balance sheets in the second quarter,” he predicted.
Although the pace of business may be easing, Richards said, he still expects another 1/4 of 1% increase next month, and then maybe “they will stop and see what happens.”
Reports from the inflation front were encouraging for the quarter, with prices rising at an annual rate of 3.2%, compared with 2.3% during last year’s fourth quarter. The increased rate was attributed to a pay raise for federal employees and a rise in energy prices. The annual core rate of inflation--a measurement of price increases excluding food and energy--was a negligible 2.1% during the quarter, compared with 1.9% in last year’s final quarter.
There was a sharp increase in imported goods during the quarter, which also helps keep inflation under control because they tend to be cheaper than domestic goods.
Meanwhile, the nation’s output of goods and services is growing faster than the rise in employment, meaning that workers are more productive. This type of growth is “noninflationary and should be encouraged because it pays for wage increases and improvements in the standard of living,” said Thomas Palley, assistant director of public policy at the AFL-CIO.
In the midst of a consumer-driven boom, “we are still very low in terms of inflation,” he said. “This is a strong healthy economy and ‘don’t rock the boat’ is the message to the Fed,” he said.
The figures issued by the Commerce Department on Thursday measure the gross domestic product, a calculation of the value of all goods and services produced by the vast U.S. economy. Everything from a computer to a manicure is included in the total.
