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U.S. economy rebounds strongly in first quarter

Casting off an end-of-year lethargy, the U.S. economy bounded ahead in the opening quarter of this year at a 4.8 percent pace, the fastest pace of growth in 2 1/2 years.
/ Source: The Associated Press

Popping out of a year-end rut, the economy zipped ahead at the fastest pace in 2½ years during the first quarter of 2006 as consumers picked up spending and businesses regained their footing.

Inflation looked tame, too, though the latest figures didn’t include last week’s oil-price spike.

“The U.S. economy is cruising along now,” said Bill Cheney, chief economist at John Hancock Financial Services, after Friday’s latest report by the Commerce Department.

Gross domestic product advanced at a 4.8 percent pace in the January-to-March quarter. That marked a rebound from the feeble 1.7 percent rate in the final quarter of 2005, when fallout from the Gulf Coast hurricanes, including high energy prices, prompted people and companies to tighten their belts.

GDP measures the value of all goods and services produced within the United States and is considered the best barometer of the economy’s fitness.

“This rapid growth is another sign that our economy is on the fast track,” said President Bush.

Recent growth hasn’t helped Bush’s standing with the public. He is shouldering his lowest-ever job approval rating, at 36 percent, according to an AP-Ipsos poll.

Democrats contend that economic expansion isn’t benefiting all. “This growth is showing up in the bottom lines of companies, but not in the paychecks of workers,” said Sen. Jack Reed, D-R.I.

The first quarter’s performance — the best showing since the third quarter of 2003 — was close to economists’ forecasts of a 4.9 percent growth rate.

Even with the economy motoring ahead, inflation moderated.

An inflation gauge closely watched by the Federal Reserve showed that core prices — excluding food and energy — rose by 2 percent, down from 2.4 percent in the fourth quarter.

The inflation reading, however, was taken before oil prices zoomed to a record high of more than $75 a barrel last week. Although prices have retreated since then, they remain high.

A separate report from the Labor Department suggested that the strengthening job market isn’t fanning inflation. Employers’ cost to hire and retain workers — wages and benefits — rose by 0.6 percent in the first quarter, the slowest pace in seven years. That mostly reflected less generous benefits.

While the slower growth in compensation packages heartened economists, it isn’t necessarily welcome news for workers. “People’s wages are going up, but they are not keeping up with inflation,” said Stuart Hoffman, chief economist at PNC Financial Services Group.

To keep inflation at bay, the Federal Reserve is expected to boost interest rates again at its May 10 meeting, which would mark the 16th increase since June 2004. But after that, the central bank could take a break — perhaps temporarily — in its 2-year-old rate raising campaign, Fed Chairman Ben Bernanke suggested Thursday.

Bernanke and other Fed policymakers indicated they don’t want to hurt economic activity by pushing rates up too high.

In the first quarter, consumers — critical players in the shape of the overall economy — got their spending back in a more-normal groove. They boosted spending at a brisk rate of 5.5 percent, compared with paltry 0.9 percent pace in the fourth quarter. The first quarter’s increase, the biggest since the third quarter of 2003, was led by spending on big-ticket goods such as cars.

Another force helping the economy was business investment. Business spending on equipment and software grew at a whopping rate of 16.4 percent, the largest gain since the first quarter of 2000. “Spending on equipment was the strongest since the last irrational exuberance of the boom in early 200,” said Joel Naroff, president of Naroff Economic Advisors.

Businesses ramped up investment on buildings and plants, too.

Government spending also supported economic growth in the first quarter. This spending went up at a 3.9 percent pace, a turnaround from a 0.8 percent dip in the fourth quarter.

Looking ahead, Bernanke said he expects the economy’s growth to moderate in coming quarters but still be sufficiently strong to generate decent job growth. Risks to the mostly positive outlook, he said, could come from any prolonged run-up in energy prices and a sharp drop in housing activity. For now, neither scenario is envisioned.