Economy's growth is better than expected - East Valley Tribune: Business

Economy's growth is better than expected

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Posted: Wednesday, June 29, 2005 6:21 am | Updated: 8:32 am, Fri Oct 7, 2011.

WASHINGTON - The economy logged a solid 3.8 percent growth rate in the first quarter of 2005, a performance that was better than previously thought and a fresh sign the expansion is on firm footing.

The new reading on gross domestic product, released by the Commerce Department on Wednesday, marked an improvement from the 3.5 percent annual rate estimated for the quarter just a month ago and matched the showing registered in the final quarter of 2004.

GDP, the broadest gauge of the economy's health, measures the value of all goods and services produced within the United States.

Stronger spending on housing projects, more investment by business in equipment and software, and a trade deficit that was less of a drag on economic growth all played a role in the higher first quarter GDP estimate.

The first-quarter's showing was slightly better than the 3.7 percent growth rate that economists were forecasting before the report was released.

"It was a solid quarter, particularly in the face of high and rising energy prices," said Mark Zandi, chief analyst at Economy.com. "It illustrates the resilience of the economy and the durability of the current economic expansion."

To keep the economy and inflation on an even keel, the Federal Reserve has boosted short-term interest rates eight times - each in quarter-point moves - since June 2004. Another bump-up is expected when the Fed wraps up a two-day meeting on Thursday.

An inflation gauge tied to the GDP report and closely monitored by the Fed showed prices - excluding food and energy - rising at a rate of 2 percent in the first quarter. While that was slightly lower than the previous estimate of a 2.2 percent rate for the quarter, it was up from the fourth quarter's 1.7 percent rate of increase.

Although economic activity is solid, job creation is choppy. Employers boosted payrolls by just 78,000 after a hiring spurt of 274,000 in April. May's job gain was the weakest in almost two years. Economists offered various reasons for May's slower job growth, including the toll of high energy prices.

In recent days, oil prices surged to a new record-high of $60.54 a barrel. Economists are trying to gauge the impact that gyrating oil prices will have on the job market and the overall economy.

High energy prices have forced many economists to lower their projections for economic growth.

The economy in the current April-to-June quarter is expected to expand anywhere from 2.6 percent to 3.8 percent. Some earlier forecasts had put growth for the quarter at a pace of around 4 percent. Projections for the third quarter range from a 2.7 percent to a 3.5 percent pace.

In the first quarter, though, spending and investment in a variety of areas fared well despite high energy prices.

Spending on housing projects sizzled at a 11.5 percent growth rate in the first quarter, compared with a 3.4 percent pace in the fourth quarter. It marked the biggest increase since the second quarter of 2004.

Fed Chairman Alan Greenspan has talked about "froth" in the booming housing market. Although he doesn't believe a national bubble has formed that could pop and cause house prices to fall, he has raised concerns about local markets.

Low mortgage rates, which have powered record-high home sales for four years in a row, are helping to keep housing activity brisk.

Meanwhile, business spending on equipment and software increased at a 6.1 percent pace. That was better than the previous estimate but down from the red-hot pace seen in the fourth quarter as companies rushed to take advantage of tax deductions to encourage sales of business equipment. These tax provisions expired at the end of last year.

Consumer spending, which accounts for roughly two-thirds of all economic activity, grew at a rate of 3.6 percent in the first quarter. That was the same as a previous estimate but down from a 4.2 percent growth rate in the fourth quarter.

On the trade front, the deficit shaved 0.6 percentage point off of GDP in the first quarter, an improvement from the 0.7 percentage-point reduction previously estimated.

One measure of after-tax profits in the GDP report showed profits growing by 1.2 percent in the first quarter from the previous quarter. That was slightly better than an earlier estimate but down from a 12.5 percent increase in the fourth quarter.

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