GDP Growth Data Downshifted
The U.S. economy bolted ahead at its fastest pace in nearly two years in the first quarter, but the rise was not quite as rapid as initially thought, the government said Friday in a report that showed weaker consumer and business spending than first estimated.
Gross domestic product, a measure of the goods and services produced within U.S. borders, raced forward at a revised 5.6% annual rate in the first three months of the year, the Commerce Department said.
The number reflected an economy climbing smartly out of recession, although it was a downward revision from the 5.8% gain the department reported a month ago and came as a surprise on Wall Street, where economists had expected a revision upward to 6%.
In addition, the report’s details suggested the economy was fundamentally weaker than the heady pace of GDP growth would suggest at first blush. The figures on consumer and business spending were revised down, and more of the growth reflected a slowdown in the rate at which businesses reduced inventories.
Consumer spending advanced at a 3.2% pace in the first quarter--still solid, but not as strong as the 3.5% increase first reported. That downward revision mostly reflected weaker spending on durable goods, such as cars, which fell at a 9.6% rate, the steepest falloff since a 13.1% plunge 11 years ago. A rush to take advantage of zero-percent financing for car purchases after the Sept. 11 attacks had pushed spending on durables up sharply near the end of last year.
The first-quarter figure for business investment spending was also revised lower. The department said business spending on structures, equipment and software plummeted 8.2% in the first quarter, considerably weaker than the initially estimated 5.7% drop.
Still, business investment did not drop nearly as sharply as it had in the fourth quarter. Combined with the pickup in durable goods orders reported Thursday, that offers hope the steep investment pullback that tipped the economy into recession was abating.
The largest contributor to first-quarter growth was a big slowdown in the rate at which businesses reduced inventories. When businesses rely less heavily on inventories to meet demand they have to step up production, which raises GDP.
The pace of inventory reduction in the first quarter was less dramatic than previously thought, giving more of a boost to GDP growth but not enough to offset other negative factors.
The report showed inflation under wraps, with the price index for personal consumption expenditures--closely watched by Fed Chairman Alan Greenspan--rising only 0.7%. Economists say a lack of inflation pressures buys the Fed time to allow the economy to gather steam before raising rates.
The report contained some good news on businesses struggling to boost profits. The government’s measure of after-tax corporate profits rose 0.9% in the first quarter of the year, the biggest gain since the second quarter of 2000.
A separate report Friday found that new-home sales rose 1% in April to a seasonally adjusted annual rate of 915,000 units, the fastest sales pace in a year.
