New data show tiny rise in GDP

The Baltimore Sun

WASHINGTON -- Government statistics released yesterday indicate that U.S. economic growth ground nearly to a stop in the first quarter, a sign that's often interpreted to mean recession is lurking. Most economists don't think the sky is falling, however, and believe a strong rebound is already under way.

The Commerce Department revised downward its earlier gross domestic product data, which had suggested that the U.S. economy grew by 1.3 percent during January, February and March.

The revised data put the growth rate at a dismal 0.6 percent, the slowest since late 2002, when the U.S. economy was recovering from a recession.

Tempering the weak growth data, however, are underlying strengths in the U.S. economy in the second quarter that appear to be driving growth back to more normal levels.

"The numbers we saw vastly understate the strength of the U.S. economy," said Nariman Behravesh, the chief economist for Global Insight, an economic consultant in Lexington, Mass.

Details within the GDP data explain his optimism.

Consumer spending growth was revised up from 3.8 percent to 4.4 percent. Nonresidential fixed investment, another important indicator of economic activity, was revised up from 2 percent to 2.9 percent.

And many economists think the sluggish first-quarter export statistics are inaccurate, given the strength of the global economy and the weaker dollar, which helps American exports.

"Put all that together and you say we're past the weak spot in the U.S. economy," Behravesh said.

Global Insight expects second-quarter growth to rebound to at least 2.5 percent. And that's on the low end of many forecasts.

"We're looking at a number north of 3 percent, actually 3.5 percent for the second quarter," predicted Sam Bullard, an economist with Wachovia, the big national bank based in Charlotte, N.C.

Wachovia economists point to the strong growth in durable goods orders and believe it suggests that manufacturing is growing again. For the year, that could mean economic growth as high as 3.2 percent, said Bullard.

"As much bad talk as there is about the economy these days, we sure are getting a lot of good numbers here," he said.

The seesaw GDP numbers for the first two quarters of this year point to the dilemma facing the Federal Reserve. It can cut its benchmark federal funds rate to spur economic activity or leave it at 5.25 percent, where it's been since last August. The Fed also could raise rates to ensure that an overheating economy doesn't spark inflation.

Dismal first-quarter numbers argue for a rate cut, but the flurry of strong monthly economic data in the current quarter and growth projections argue for leaving the Fed's benchmark rate alone or raising it.

That conflict is clear in the minutes, released Wednesday, of the Fed's most recent rate-setting meeting May 9. They show that Fed Chairman Ben S. Bernanke and his colleagues see higher inflation as a greater danger than slower economic growth.

Fed economists, the minutes show, expect the U.S. economy to return close to its growth potential by late this year.

Since labor markets are already tight, that could pressure companies to raise wages, a key component of inflation. When companies raise wages, they also must raise the prices of their products or services, and that has a cascading effect across the U.S. economy.

"All told, for most participants, the apparent tightness of the labor market remained a significant source of upside risk to inflation," the Fed minutes said, pointing to a preference to hold the line and being prepared to increase rates if inflation doesn't subside.

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