Consumers Help Give Economy Surprise Jolt
The U.S. economy grew at an unexpectedly strong 2% annual rate in the first three months of the year, thanks largely to buoyant shopping by American consumers.
The Commerce Department said Friday that the nation’s gross domestic product--its total output of goods and services--expanded at twice its pace during last year’s final three months and at twice what analysts had expected.
The surprising strength suggests the U.S. economy is not free-falling into a recession and may be poised to bounce back from its current slowdown. But it remains vulnerable as layoffs continue at major technology employers and other weaknesses crop up. The 2% growth rate of the January-through-March period still left the nation’s economy performing well below levels of a year ago when it roared along at a 5.2% annual rate.
Almost all the economy’s recent strength was because of consumers, who brushed aside worries about declining stock wealth and rising layoff threats to buy cars and houses at near-record rates.
Consumer purchases of durable goods, those lasting more than three years, jumped 11.9%, according to the department. By contrast, business investment in equipment and software, which had been thought to be driving the economy until recently, dropped more than 2%.
Inventories also dropped in a trend that economists said could bode well for the coming months. That’s because firms are likely to delay layoffs or even boost employment to replenish their stocks of goods for sale.
The stock market rallied on news of the stronger-than-expected growth. But gains were tempered by concerns that the economy’s performance reduced chances that the Federal Reserve would cut interest rates further.
The Dow Jones industrial average rose 117.7 points, or 1.1%, while the tech-heavy Nasdaq composite index increased 40.8 points, or 2%, to 2,075.68 Friday.
Economic optimists exulted over the first quarter’s stronger-than-expected growth rate. “This is no recession, baby!” said Diane C. Swonk, chief economist at Bank One Corp. in Chicago.
“It’s a wonderful, sunny day here in Washington, and our 2% real growth rate . . . is nothing but good news,” said Treasury Secretary Paul H. O’Neill.
Federal Reserve Chairman Alan Greenspan added to the celebratory mood by saying in a speech that gains in worker productivity--a key trend underlying the economy’s recent strength--were likely to continue, despite the recent slowdown.
But many analysts greeted the latest growth numbers with considerable caution, describing the economy as at a tipping point between strong growth and recession.
The skeptics expressed doubts that consumers could continue bolstering the economy if layoffs spread and the stock market remained in the doldrums. They said the employment benefits of inventory rebuilding could prove short-lived and warned that the job markets had shown new signs of coming unstuck.
The Labor Department reported Thursday that initial claims for unemployment insurance jumped at an unexpectedly fast pace last week to their highest level in five years, while help-wanted ads fell to a near-decade low.
“People are trying to maintain their living standards by continuing to buy,” said Janet L. Yellen, a former Fed governor and UC Berkeley economist. “But I’m worried about whether consumer spending can hold up.”
New results from a widely followed consumer survey showed that Americans are increasingly apprehensive about their financial situations. The University of Michigan’s index of consumer sentiment dropped to 88.4 in April from 91.5 in March and is now 20 points below its high point of a year ago.
Survey officials said that one-third of households questioned reported that their families’ financial condition worsened in April and that two-thirds believe the economy is in recession.
Despite such worries, Americans are buying with considerable verve. Figures released earlier this week showed that consumers were snapping up new homes at a seasonally adjusted annual pace of 1.02 million during March--an all-time high--and were buying preexisting homes at a near-record 5.44 million rate.
Analysts said that, while corporate America would contribute to growth in the coming months by rebuilding inventories, it is unlikely to return to its wild investment spree of the last few years.
The reduction in inventories from January through March slashed 2.5 percentage points from the nation’s growth rate. Analysts said that rebuilding stocks could add a similar fraction to growth in the coming months. “The cupboard is bare and business is going to have to refill it,” said Swonk, the Chicago economist.
Some analysts saw the new growth figures as evidence the economy is stronger than the Fed believes and criticized the central bank for overreacting to signs of a slowdown.
Fed policymakers have slashed short-term interest rates two full points since the start of the year. Last week the Fed took the unusual step of cutting rates between regularly scheduled meetings and after signaling it had no plans for an immediate cut, a move that prompted widespread speculation policymakers had spotted some previously undisclosed danger to the economy.
“They’re trying to overmanage the economy,” charged Mickey D. Levy, chief economist of Bank of America Corp. in New York.
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GDP
Here is a look at the gross domestic product, which is the total value of all goods and services produced in the United States.
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Annualized quarterly change
2001: +2%
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Source: Commerce Department
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BOOST FOR MARKETS
Investors emboldened by the latest economic report sent the Dow up 117 points. C1
