Originally created 06/28/02

Economy grows at sizzling 6.1 percent

WASHINGTON -- The economy sprang back from last year's recession, growing at an annual rate of sizzling 6.1 percent in the January-March quarter, the strongest showing in more than two years.

The latest reading on gross domestic product - which measures the total output of goods and services produced within the United States - showed the economy grew more briskly during the first quarter than previously thought, the Commerce Department reported Thursday.

The government first estimated that GDP for the period grew at a 5.8 percent pace and then revised that down to 5.6 percent growth rate a month ago.

While good news, Thursday's report shows where the economic recovery has been. Federal Reserve Chairman Alan Greenspan and his colleagues are focused on where it is going.

Citing uncertainties about the recovery's vitality, Fed policy-makers left short-term interest rates at 40-year lows Wednesday, the fourth time this year they opted to hold rates steady.

Recent economic reports confirm that recovery has lost steam. Some economists believe GDP will grow at a rate of just 2.5 percent or lower in the current quarter.

With interest rates remaining low, consumers might be motivated to spend more and businesses motivated to boost investment in new plants and equipment. Both are crucial ingredients in the recovery.

A startling stream of accounting scandals and worries about jobs helped push Americans' confidence in the economy down in June to a four-month low.

Economists worry that fallout from the latest accounting scandal, involving telecommunications giant WorldCom, could not only jolt confidence but also chill consumers' willingness to spend and make companies even more wary of making big commitments, including capital investments and hiring.

Separately, the Labor Department said new claims for unemployment insurance fell last week by 10,000 to 388,000, suggesting that the pace of layoffs may be stabilizing. Still, economists say that the jobs market remains sluggish.

In the first quarter, economic growth received its biggest boost from slower inventory liquidation by businesses, which added 3.39 percentage points to GDP. That's a turnaround from the 2.16 percentage-point reduction from GDP in the fourth quarter, a key source of the economy's weakness. At that time, companies throttled back production and focused on getting rid of excess stocks of unsold goods, which piled up during the slump.

Consumers, whose spending accounts for two-thirds of all economic activity, also gave a lift to the economy in the first quarter. Consumers increased spending at a 3.3 percent rate. But that was down from a brisk 6.1 percent pace in the fourth quarter.

Greenspan worries that consumers who spent throughout the recession won't have a lot of pent-up demand coming out of it, making for a less than sizzling recovery. U.S. shoppers showed less vigor in May.

Business investment in new equipment and plants continued to fall in the first quarter, but at a slower pace. That investment declined at an annual rate of 6.2 percent in the first quarter, compared with a 13.8 percent rate of decrease in the fourth quarter.

The first-quarter drop wasn't as deep as the 8.2 percent rate of decline reported a month ago, a factor in the stronger overall GDP showing. Economists say that a turnaround in capital spending is a necessary ingredient to a full recovery for the national economy.

Another factor in the upward revision to GDP: the U.S. trade deficit was less of a drag on the economy than estimated a month ago. The deficit shaved 0.75 percentage point from first-quarter GDP, versus the 1.06 percentage-point reduction previously thought.

Thursday's report also showed that after-tax profits of U.S. corporations rose at a rate of 1.4 percent in the first quarter, an improvement from the 10.6 percent rate of decline in the previous quarter.

The 6.1 percent growth rate for first quarter GDP was the strongest since the fourth quarter of 1999 when GDP rose at a 8.3 percent rate.

The January-March performance was remarkable given the economy actually shrank at a 1.3 percent rate in the third quarter of 2001. GDP grew at a below-par 1.7 percent rate in the fourth quarter.


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