U.S. Economy Surges 5.8% in First Quarter

WASHINGTON — The U.S. economy snapped back from recession and the Sept. 11 terror attacks to grow at a 5.8% annual rate during the first three months of 2002, its fastest in two years.

But separately, a widely followed consumer confidence measure slipped to a three-month low, suggesting that consumption--and with it further growth--may slow from its early-year pop.

The gross domestic product, the nation’s total output of goods and services, expanded at a faster-than-expected pace during January through March as die-hard consumers boosted purchases of clothes, furniture and services such as medical care, and shellshocked businesses improved their inventories.

The new growth numbers, issued Friday by the Commerce Department, raised anew the question of whether the economy was ever in recession. And they represented a tribute to the nation’s economic resourcefulness in rebounding so quickly from the September attacks.

But they failed to answer the big question of the moment: Is business finally taking the load off consumers, whose spending has kept the economy afloat in the last year, and resuming the kind of fast-paced investment that fueled much of the late-1990s boom?

“We still don’t know whether the baton has been passed from consumers to business,” said Diane C. Swonk, chief economist of Bank One Corp. in Chicago.

The new statistics show that business investment in the crucial equipment and software sectors was essentially flat during the latest quarter, an improvement over the 5.3% decline of the previous quarter but hardly evidence of a new rush to invest.

The new growth figures did little to buoy investors, who sent stocks sharply lower Friday.

U.S. stocks turned in their worst weekly performance since September. The Dow Jones industrial average fell 124.34 points, or 1.2%, on Friday to 9,910.72, its first close below the 10,000 mark in two months. The technology-heavy Nasdaq composite index tumbled 49.81 points, or 2.9%, to 1,663.89.

For the week, the value of U.S. stocks slipped $491 billion, the largest decline since trading resumed in the wake of the Sept. 11 attacks.

Stocks were hurt in part by concern that the economic recovery isn’t translating into a fast profit turnaround for many companies, analysts said.

Investors also fretted over a new University of Michigan report that consumer confidence fell in April, largely on worries about the Israeli-Palestinian conflict and the attendant surge in gasoline prices. The index slipped to 93 from 95.7 in March, its lowest level since January.

Last quarter’s 5.8% growth rate followed a 1.7% expansion during the previous quarter and extended an economic performance that has left economists and policymakers puzzled.

There were signs of economic weakness as early as the spring of 2000, when the stock market began its long dive, and the nation’s employment started sliding more than a year ago. But the economy has actually contracted for only a single quarter, from July through September, and it shrank only at a modest 1.3% pace. Recessions are traditionally thought to be at least two consecutive quarters of contraction.

Although virtually every other recession since World War II has started with consumers pulling back and businesses responding by cutting production, this time the opposite occurred. Consumers have continued to buy while businesses, overextended with investments and facing new competition, contracted abruptly in late 2000.

Analysts complained that Friday’s numbers were particularly hard to interpret because Intel Corp., the world’s largest maker of semiconductors, has stopped telling the government about its orders, inventories and shipments, making it harder to estimate economic trends.

Intel’s decision means the new investment data are “corrupt,” Swonk said. “It’s hard to know what to make of corrupt data.” Intel said it is no longer providing information because it thinks the statistics the government generates from them are meaningless.

Pessimists acknowledged surprise at Friday’s robust growth numbers.

“They definitely were firmer than we’d expected,” said William Dudley, chief U.S. economist with Goldman Sachs in New York.

But even optimists such as Swonk said the latest snapshot of the economy does not provide a clear picture of what’s to come.

“They show the economic rocket has taken off,” Swonk said. But “they don’t show whether the booster jets needed to keep it going have kicked in.”

The biggest contributor to last quarter’s growth was business inventory improvement. Although corporate America continued shrinking its backup supply of goods, it did so at a much slower pace, which amounts to a production increase over the previous quarter.

Private business inventories fell by $36.2 billion in the first quarter, compared with $119.3 billion in the fourth quarter and $61.9 billion in the third quarter, the Commerce Department said. The change accounted for 3.1 percentage points of the 5.8% growth rate.

Continued consumption by average Americans was the next biggest contributor. But in contrast to the fourth quarter, when people were buying big-ticket items such as cars, last quarter’s spending focused on less expensive items such as clothes, shoes and food, government figures show.

President Bush used the occasion of Friday’s GDP report to tout further tax cuts.

The president called the 5.8% figure “a very encouraging sign,” but added: “I am not content. We’ve got to do more.” The “more” that’s needed, according to Bush, is to make the administration’s 10-year, $1.3-trillion tax cut permanent. “Tax relief is an incredibly important part of this recovery,” he said.

Bush dismissed reports that tax revenue is running far below expectations, threatening to double the size of this year’s budget deficit. He said that as a candidate he warned of deficits if the country faced war, recession or national emergency.

“In this case, we got all three,” he said. “And we’re recovering from all three.”

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Times staff writer James Gerstenzang in Crawford, Texas, contributed to this report.