McClatchy Washington Bureau

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WASHINGTON — The U.S. economy grew at a faster rate in the first quarter of this year than previously thought, the government reported Thursday, further muddying the question of whether the sluggish U.S. economy is now in recession.

Between January and March, the U.S. economy grew by 0.9 percent, not the 0.6 percent projected a month ago, the Commerce Department reported Thursday morning.

Normally, such a slight upward revision wouldn't merit much attention. But economists and policymakers are confounded by today's economy, which is being dragged down by a deep housing slump and soaring energy prices. Some indicators point to recession, while others suggest that the economy is continuing to grow despite stiff headwinds.

"We're pleased that the number is higher than the original number. Inside the numbers, the shape ... is healthier than the first set of numbers," Commerce Secretary Carlos Gutierrez said in a telephone interview with McClatchy.

Gutierrez pointed to the revised numbers showing continued strong exports, healthier business investment than first thought and a reduction in business inventories, which were thought to have been making economic growth appear stronger than it actually was.

Also on the positive side, the Commerce Department reported Wednesday that orders for durable goods — big-ticket items such as cars and aircraft — declined less than expected. When transportation was excluded, durable goods orders rose 2.5 percent and pointed to a stronger economy than some other indicators suggest.

Wall Street initially rallied on the growth numbers and a steep drop in crude oil prices, which fell $4.41 to settle at $126.62 in Thursday trading on the New York Mercantile Exchange.

Traders also cheered a report from MasterCard Inc., that said it expected strong revenue growth over the next three years. Much of that would come from overseas growth but an important element would be Americans turning to plastic now that they can no longer tap into their home equity lines of credit.

The Dow Jones Industrial Average gave up earlier gains, however, closing up 52 points to 12,646.22. The S&P 500 was up 7.42 points to 1398.26 and the Nasdaq finished up 21.62 points at 2508.32.

Still, experts such as former Federal Reserve Chairman Alan Greenspan still think that a mild recession is probable this year. Financial analysts remain grim about the economic outlook, pointing to slumping consumer confidence and four successive months of job losses as signs of broader problems.

"Second quarter growth now looks likely to be close to zero — we expect a small negative. We expect some improvement in the third quarter, helped by stimulus payments, but then slower growth again in the fourth," said Nigel Gault, the chief U.S. economist for Global Insight, a forecaster in Lexington, Mass. "The economy is far from out of the woods."

About $120 billion worth of one-time tax rebate checks will have been sent to consumers by the end of July, and they're expected to provide a temporary boost. Gutierrez said the rebates, combined with delayed benefits from steep cuts in interest rates by the Federal Reserve, should spark a stronger second half of 2008 for the U.S. economy.

Consumer spending grew 1 percent in the first three months of the year, but that's expected to fall sharply because of the recent jump in oil prices to more than $130 a barrel. Gasoline prices averaged $3.95 a gallon on Thursday, according to the AAA Motor Club, up 35 cents from a month ago and 78 cents from a year ago.

As a result of high energy and food prices, consumer confidence slumped to a 16-year low, the Conference Board reported Tuesday, as Americans fretted about the rising cost of filling their pantries and their gas tanks. Of concern to the Federal Reserve, consumer expectations about inflation for the next 12 months jumped sharply.

The stronger-than-expected first-quarter growth may prompt the Fed to begin raising interest rates again later this year because inflation remains on the high side of the Fed's comfort zone.

Adding to inflation concerns, the Dow Chemical Co. Wednesday announced price hikes of up to 20 percent. The increases, which take effect on Sunday, could raise the prices of everything from sandwich bags and baby wipes to Tupperware and soft drinks.

In a written statement, Dow CEO Andrew Liveris lashed out at both the Bush administration and Congress for policy failures that he said have led to today's high energy prices.

"For years, Washington has failed to address the issue of rising energy costs and, as a result, the country now faces a true energy crisis, one that is causing serious harm to America's manufacturing sector and all consumers of energy," he said, noting that since 2002, Dow has quadrupled what it spends to acquire raw materials derived from crude oil.

ON THE WEB

Read the Commerce Department GDP release.

Read the Dow Chemical statement.