First-quarter economic growth revised up

/ Source: The Associated Press

Emerging from a year-end rut, the economy dashed ahead in the opening quarter of this year at a 5.3 percent pace, the fastest in 2½ years.

The new snapshot showed gross domestic product was even stronger during the January-to-March period than the 4.8 percent annual rate first estimated a month ago, the Commerce Department reported Thursday.

Gross domestic product measures the value of all goods and services produced within the United States and is considered the best barometer of the country’s economic fitness.

The upgraded reading on GDP, based on more complete information, mostly reflected stronger U.S. exports and better inventory building by businesses.

Economists, however, were predicting an even bigger upgrade to the first-quarter reading. Before the release of the report they were forecasting economic growth to clock in at a 5.8 percent pace. Even though the revised figure fell short of that, it nonetheless made clear that the economy had snapped out of its end-of-year lull.

The economy in the final quarter of 2005 grew at a feeble 1.7 percent pace. Fallout from the Gulf Coast hurricanes, including high energy prices, prompted people and companies to tighten their belts.

Consumers and businesses regained their appetite for spending and investing in the first quarter, a major factor underpinning the brisk pace of growth logged for the overall economy.

Their appetite, though, was a tad less hearty than initially estimated.

Consumers boosted their spending in the first quarter at a 5.2 percent pace. That was the strongest since the third quarter of 2003, but was slightly less than the 5.5 percent pace first estimated.

With spending outpacing income growth, the personal savings rate — savings as a percentage of after-tax income — dropped to negative 1.3 percent in the first quarter, the worst showing since the third quarter of 2005.

Business spending on equipment and software, meanwhile, zoomed ahead at a 13.8 percent pace in the first quarter. That was the best showing since the third quarter of 2004, but wasn’t as robust as the 16.4 percent growth rate for such spending initially estimated a month ago.

The report also showed that companies continued to fatten their profits.

One measure of after-tax profits in the GDP report showed profits increased by 8.8 percent in the first quarter, following a 13.8 percent rise in the prior period.

Economists predict economic growth in the April-to-June quarter probably slowed to a pace of around 3 percent to 3.5 percent, which would still be a healthy performance. One of the things the Federal Reserve will be keeping close tabs on is the extent to which a less energetic housing market crimps consumer spending and thus weighs on overall economic activity.

Another thing policy-makers will be monitoring is whether high energy prices feed into the costs of other goods and services and spread inflation throughout the economy.

An inflation gauge closely watched by the Fed showed that core prices — excluding food and energy — rose 2 percent in the first quarter. That was unchanged from an initial estimate and actually marked a moderation from a 2.4 percent rise in the fourth quarter.

The inflation reading, however, was taken before oil prices shot up to a record high of $75.17 a barrel in late April. Oil prices are now hovering above $69 a barrel.

Energy prices are a wild card for the economy.

Rising energy prices drive up inflation. Or, they can hobble economic activity by forcing consumers and businesses to cut back spending on other things. Or, high prices can result in both scenarios, which would be doubly bad for the economy.

To fend off inflation, the Federal Reserve on May 10 boosted interest rates for the 16th time in two years. Some economists believe another rate increase is in store when the Fed meets next, June 28-29. Others, however, think the Fed will take a pause in its rate-raising campaign.

Fed Chairman Ben Bernanke told Congress on Tuesday that he and his colleagues will be relying heavily on what incoming data says about inflation and economic activity to shape its rate decision.

Even though economic activity is solid, high energy prices and worries about the direction of the housing market have weighed on consumers’ confidence in the economy.

President Bush’s standing with the public also has sunk. Bush’s job-approval rating stood at 33 percent in early May, the lowest in AP-Ipsos polling.