Economy grew briskly in first quarter, government says

McClatchy NewspapersApril 30, 2010 

WASHINGTON _ The Great Recession is over all but officially, as the U.S. economy grew at a solid 3.2 percent annual rate in the first three months of this year, the third consecutive quarter of growth, the Commerce Department reported Friday.

Spending by both consumers and business powered the growth. Consumption rose 3.6 percent from January through March, the department said in its preliminary reading, a sign that consumers, who drive 70 percent of U.S. economic activity, were feeling more comfortable with their economic positions. Their spending rose at only a 1.6 percent annual rate the previous quarter.

Business investment was robust as well, showing that the economy’s expansion has more than one engine, which bodes well for sustaining it.

President Barack Obama said the GDP numbers are heartening but not enough.

"What this number means is that our economy as a whole is in a much better place than it was one year ago," Obama said, adding that "the economy that was losing jobs one year ago is adding jobs."

However, the president noted that many Americans still feel trapped in a downturn. "I measure progress by a different pulse, the progress the American people feel in their own lives," he said.

Analysts cheered the data.

“Consumers drove growth during the quarter as rising stock prices got high-income consumers out shopping again,” said Mark Zandi, the chief economist for forecaster Moody’s Analytics. “Most encouraging was another quarter of strong business investment in equipment and software, suggesting that they are getting their groove back and will soon resume hiring more aggressively.”

If sustained, the upturn in U.S. consumption would be good news for the whole world, since the United States remains the key global economic engine.

“What was particularly encouraging about today’s GDP numbers is that U.S. consumption appears to be on a strong recovery path,” said Frederic Neumann, co-head of Asian Economic Research for the global Hong Kong bank HSBC.

Friday's GDP numbers were in line with a revised forecast from the International Monetary Fund, which predicted earlier in April that the world's economy would grow at a rate above 4 percent this year, significantly better than its initial 1.9 percent forecast.

Increases in business spending and equipment investment _ up 4.1 percent and 13.4 percent, respectively _ are also important, because they signal that growth wasn’t fueled by firms clearing out their warehouses and stockrooms. Such inventory reduction helped drive growth to a blistering 5.6 percent annual rate in the last three months of 2009, a number that wasn’t expected to carry over into the first quarter of this year and did not. Inventory reduction fell by 3.8 percentage points from January through March.

“While growth is about half of the robust 5.6 percent pace in the last quarter of 2009, the underlying dynamic is actually healthier and better balanced: More of the rise in GDP came from domestic demand and less from an inventory correction,” Bart van Ark, the chief economist for nonprofit forecaster The Conference Board, said in a statement. “Still, the strength and durability of this recovery remain in question, as the economy sails into strong head winds over the next few quarters.”

Those head winds include enormous drops in tax revenue across many state governments, which are slashing spending and cutting jobs, as well as a growing debt crisis in the European Union that's slowing U.S. exports and spooking credit markets. Additionally, the stimulus money that Congress appropriated will begin to thin out late this year and next year, taking away a source of “juice” for the economy.

“The proverbial economic coast is clearing, but it is not yet clear,” said Zandi.

Christina Romer, the head of the White House Council of Economic Advisers, was cautiously optimistic in her Friday blog posting after the GDP announcement. She thinks that the economy has clawed out of a deep hole but remains fragile.

“To put the rate of growth into perspective, real GDP fell at a 6.4 percent rate in the first quarter of 2009. There is no question that the economy has improved dramatically over the past year. Each additional quarter of GDP growth is a welcome sign that the economy is healing from a severe recession that cost over 8 million jobs and wiped out trillions of dollars in household and family wealth,” Romer wrote. “Given the severity and depth of the recession, it will take a number of quarters of robust growth and strong employment gains to return the economy to full health and full employment.”

While welcome, the first-quarter growth still isn't strong enough to make a significant dent in unemployment. The economy needs to grow by at least 3.5 to 4 percent annually to boost hiring sharply and bring down a jobless rate that's stood at 9.7 percent for the last three months. A record 6.5 million Americans have been out of work for six months or more, and economists estimate that growth must be in the 5 percent range this year just to shave off a percentage point from the jobless rate.

That’s why next Friday’s jobs report from the Labor Department will be closely watched. Employers added 162,000 jobs in March, and there are expectations for similar strong growth in employment in April.

Some details in Friday's GDP report suggest that sustainable hiring is just around the corner. Output from non-farm businesses grew 4.4 percent in the first quarter, accompanied by strong productivity gains. As the recovery gains steam, doing more with fewer workers becomes more difficult, and employers may find it necessary to begin hiring in earnest.

“The combination of steady output growth and slower productivity gains underpins our expectation that labor market recovery will continue to gain momentum,” Alan Levenson, the chief economist for T. Rowe Price Associates, said in a note to investors Friday.

Most mainstream economists think that the economy will grow from 3 percent to 3.5 percent in the current quarter, powered by rising manufacturing production.

“Output has come back strongly more recently, and the early data for the second quarter are encouraging,” economists for Wells Fargo Securities said in a note to investors.

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