The GDP grows at a 2% annual rate

The U.S. economy, helped by resilient consumers and an improving trade performance, posted stronger-than-expected growth in the first three months of this year, a period when it had been feared the country could slip into recession, the Associated Press (AP) reported.  

The Commerce Department said Friday that the gross domestic product-the country’s total output of goods and services-advanced at an annual rate of 2% from January through March.

 

Not only did the GDP remain in positive territory, but the 2% pace was double the 1% growth rate of the final three months of 2000 and also double what many analysts had been expecting for the first quarter.

 

The positive GDP report brought smiles to the Bush administration, which had been concerned that the economy could dip into recession in President Bush’s first months in office.

 

“It is a wonderful, sunny day here in Washington and our 2% real growth rate in the first quarter is nothing but good news compared to what most people expected,” Treasury Secretary Paul O’Neill told reporters, the AP reported.

 

Stock prices rose in early trading Friday, with the Dow Jones industrial average up nearly 70 points in the first hour.

 

Federal Reserve Chairman Alan Greenspan had worried earlier this year that economic growth might have stalled out altogether, ending the country’s record 10-year-long economic expansion. The Fed in January began cutting interest rates aggressively in an effort to ward off a downturn.

 

With a positive GDP, many economists believe the United States may have escaped the period of maximum danger for a recession. They are looking for growth to improve further in coming quarters, the AP reported.

 

However, more pessimistic analysts contend that the threat of a recession remains, with the possibility that rising unemployment in coming months could yet precipitate a plunge in consumer spending, the AP reported.

 

“Consumers are holding their own,” Merrill Lynch Chief Economist Bruce Steinberg said of Friday’s report, the AP reported. But he projects consumers will tighten their belts in the second and third quarters as the labor market weakens.

 

“If layoffs mount and payrolls begin to contract sharply, consumer spending will weaken further. At that point, the economy would be in recession,” Steinberg told the AP.

 

But other analysts believe that Greenspan and his colleagues, with their four interest rate cuts so far this year and more expected, will be able to keep consumer and investor confidence from going into a nosedive.

 

Analysts say the central bank will have room to cut rates further because inflationary pressures have been easing, as measured by the Consumer Price Index.

 

However, an inflation gauge tied to the GDP did not paint as reassuring a picture. It showed prices rising at an annual rate of 3.3 percent in the first quarter, the fastest pace in a year, reflecting higher costs for services such as medical care and for natural gas and electricity.

 

The 2% GPD growth rate in the January-March quarter reflected strength in consumer spending, which was rising at an annual rate of 3.1 percent. That reflected a huge jump in spending on durable goods – such as cars, appliances and furniture – which soared at an annual rate of 11.9 percent after having shrunk at an annual rate of 3.1 percent in the fourth quarter.

A big drop in consumer spending on autos in the final three months of last year and weak Christmas sales had been major factors leading economists to fear that the country was heading into a downturn.

 

The boost in consumer spending contributed more than 2% points to growth in the first quarter. Another big positive factor was a narrowing trade deficit, reflecting a drop in imports, which added 1.4 percentage points to growth, the first positive contribution from trade in more than two years.

 

Other boosts to growth came from a rebound in housing construction and strong spending by governments.

 

The biggest drags on growth in the first quarter came from a continuing effort by businesses to reduce an overhang of unsold goods. The drop in inventories subtracted 2.5 percentage points from growth.

 

A drop in business investment on computers and other equipment, which the Fed cited as a new worry in its latest rate cut, subtracted 0.2 percentage point from growth in the first quarter.

 

While the 2% GDP growth was double what had been expected for the first quarter, it still left the U.S. economy performing far below levels of a year ago. In the first half of 2000, the economy soared at an annual rate of 5.2%.

 

However, last summer, under the impact of six interest rate increases engineered by the Fed to keep inflation under control, growth slowed to a rate of just 1.6% in the second half of 2000.

 

The various crosscurrents in the first quarter left overall GDP rising at a 2% annual rate, an increase that amounted to an extra $46.2 billion in output at an annual rate after adjusting for inflation, pushing total GDP to $9.44 trillion.

 

Before adjusting for inflation, total economic output in the first quarter was growing at an annual rate of $10.24 trillion.