Roaring American economy swinging high in first quarter

Propelled by a rip of consumer spending and brisk business investment, the US economy grew vigorously at an annual inflation-adjusted rate of 4.8% in the first quarter, the Commerce Department reported Friday. The first quarter results showed the fastest pace of growth since the summer of 2003 as the nation's economy regained momentum recovering from the Katrina hurricane. The burst offset a meager 1.7% growth rate in the last three months of last year after the hurricane struck the Gulf Coast.

Only once in George W. Bush's presidency — when the economy grew at a 7.2% rate in the third quarter of 2003 — has economic growth been more robust than in the first quarter. The GDP report showed a gauge of personal spending excluding food and energy an inflation measure favored by the Federal Reserve advanced at a 2 percent rate in the first quarter compared with 2.4 percent in the fourth quarter last year. Overall business spending increased by 14.3 percent, the fastest pace in six years. Exports accelerated by 12.1 percent. Imports grew more, however, at a rate of 13 percent, contributing to the nation's record trade deficit. Even the government contributed to growth, powered by a 10 percent increase in military spending. President Bush called the report "impressive" and "another sign that our economy is on the fast track."

Even with the economy motoring ahead, inflation moderated. A gauge 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. But the numbers do not reflect this month's surge in oil prices. A Labor Department report suggested 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. This new evidence also suggests that ordinary workers were still not keeping pace with inflation.

But amid the echoing din of cash registers at stores across the nation, most analysts expect that mighty American economy may be turning quieter as the red-hot housing market cools and high energy prices take their toll. Even as the government report portrayed an economic engine firing on all cylinders, most economists argue that growth is poised to settle into a more moderate pace, slowed by high energy prices, rising interest rates and a softer housing market. "This is the last big G.D.P. number we are going to get in this economic cycle," said Ian Shepherdson, chief United States economist at High Frequency Economics in Valhalla, N.Y. "We are headed toward a slowing path." Analysts generally agree that the economy can't sustain for long the first quarter's torrid pace.

Consumers — as usual — were largely responsible for the strong first-quarter growth. Expenditures for personal consumption surged 5.5%, the Commerce Department said, and accounted for 3.8 percentage points of the 4.8% increase in economic output. And despite their spending spree in the first three months of 2006, American consumers are showing some signs of fatigue, as the University of Michigan reported yesterday that its index of consumer expectations declined in April. For typical Americans, the big question is how much the economy will slow. The answer will depend, in part, on how much of a hit rising interest rates and energy prices take out of consumers' spending power. But perhaps more important, it will crux on what happens in the housing market. A fragile housing market is expected to weigh on the economy in two ways. Firstly, construction is expected to slow from its recent fast pace. Michael Carliner, an economist at the National Association of Home Builders, said that by the third quarter of the year, home building would stop contributing to economic growth and become a slight pull on the economy. Secondly, a softer housing market will also slow growth by making it harder for consumers to borrow against the rising values of their properties. Home equity loans and mortgage refinancing, which have fueled spending on furniture, electronics and other household goods, have already started declining and could fall faster if interest rates jump or home prices fall. Still, with inflation remaining modest, fatter payrolls and additional jobs are expected to support consumer spending. That's why many economists contend that any slowing of the economy is likely to be gradual and mild.

The report on economic activity also offered some reassuring signs. The closely watched core price index for personal consumer expenditures, excluding food and energy, increased just 1.9 percent over the previous year, a more modest rate of inflation than the previous quarter. But if the economy does not downshift soon, some — in contrast to those predicting a sharp deceleration — fear that the economy could even overheat. "We haven't yet seen compelling proof of a slowdown," said Robert DiClemente, chief United States economist at Citigroup. "We are not out of the woods yet."

Stock prices fell, taking their cue more from a disappointing profit forecast by software giant Microsoft Corp than from positive economic news. The major indexes ended mixed for the week and for April. The Dow Jones industrial average fell 0.14 percent to end at 11,367.14 while the Nasdaq Composite Index shed 0.95 percent to end at 2,322.57. The Standard & Poor's 500 index added 0.89, or 0.07 percent, to 1,310.61, and the Nasdaq fell 22.38, or 0.95 percent, to 2,322.57. Bonds climbed after the release of the GDP data, the dollar was mixed against other major currencies, and gold surged.