U.S. First-Quarter Gross Domestic Product Rises at a 3.8% Rate
U.S. First-Quarter Gross Domestic Product Rises at a 3.8% Rate
June 29 (Bloomberg) -- The U.S. economy grew at a 3.8 percent annual rate from January through March, matching the pace in previous three months, as the trade deficit narrowed and home construction increased more than initially estimated.
The final estimate of gross domestic product, the total volume of goods and services produced in the U.S., compares with the 3.5 percent rate that was reported May 26, the Commerce Department said today in Washington. Inflation rose at a slower pace than the government reported last month.
Federal Reserve policy makers, meeting today and tomorrow, are forecast to raise interest rates a ninth straight time to ensure that eight straight quarters of growth exceeding 3 percent, the longest stretch in almost two decades, doesn't fuel inflation. The first quarter may prove the strongest three months of the year as higher crude oil prices keep growth from accelerating, economists said.
``Oil at $60 a barrel is a negative for the outlook,'' said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh, before the report. ``It's not going to halt economic growth, but it's one of the things that's slowing global economies.''
The median forecast in a Bloomberg News survey of 70 economists called for a 3.7 percent pace in the first quarter.
GDP rose to $11.1 trillion when annualized and adjusted for inflation. Without adjustment, the economy grew at a 6.7 percent annual pace, the strongest in a year, to $12.2 trillion for the quarter compared with 6.2 percent in the previous three months.
The U.S. trade deficit subtracted 0.58 percentage point from first-quarter growth, compared with 0.67 percentage point estimated in the government's preliminary report.
Home Construction
Residential construction increased at an 11.5 percent annual rate in the first quarter, revised from an 8.8 percent pace estimated last month. At the same time, the government's measures on prices were revised down in part because prices of single- family homes rose less than initially reported.
The personal consumption expenditures price index, a measure tied to consumer spending, rose 1.9 percent, compared with 2.1 percent estimated last month and 2.7 percent in the fourth quarter.
Stripping out food and energy, the gauge rose at a 2 percent annual rate last quarter. The core measure, which Fed policy makers watch, increased 1.7 percent in the final three months of last year.
The GDP price index, a measure of inflation tied to the report, rose at a 2.9 percent annual rate, revised from 3.2 percent.
Fed
U.S. central bankers will raise their overnight bank lending rate a quarter percentage point to 3.25 percent at the conclusion of their two-day meeting tomorrow, based on the median of estimate in a Bloomberg News survey of economists.
Consumer spending, which accounts for more than two-thirds of the economy, expanded at a 3.6 percent annual pace, the same as estimated last month and compared with a 4.2 percent rise in the fourth quarter. Last year's consumer spending growth of 3.8 percent was the most since 2000.
Business fixed investment, which includes spending on commercial construction as well as on equipment and software, rose at a 4.1 percent annual rate in the first quarter. That compares with the preliminary first-quarter estimate of 3.5 percent and a 14.5 percent gain in the fourth quarter.
Spending on equipment and software grew at a 6.1 percent annual rate. The government earlier estimated such spending grew at a 5.6 percent rate after an 18.4 percent gain in the fourth quarter.
`Very Strong'
The economy ``looks very strong,'' said Richard Davidson, chief executive of Union Pacific Corp., the biggest U.S. railroad by sales, in an interview yesterday. ``We have seen a slight weakness and most is related to the automotive industry. But other than that, we are seeing strong demand in almost all areas.''
The pace of first-quarter economic growth was faster than the 3 percent annual average during the past three decades. The last time growth exceeded 3 percent for eight or more quarters was from January-March 1983 to the first three months of 1986.
The U.S. economy remains the strongest of all major industrialized nations. Growth this year is forecast at 3.5 percent, according to a Bloomberg survey of economists earlier this month. The European Central Bank projected earlier this month that Europe's economy will grow 1.4 percent this year. The European Commission predicts the economy in the U.S. will outpace the euro region for a 13th year in 14.
Energy
In Japan, the economy grew an inflation-adjusted 1.2 percent in the first quarter compared with the previous three months. Higher energy costs are weighing on global growth. Crude oil closed at a record $60.54 a barrel on June 27.
Southwest Airlines Co., the only major U.S. carrier to remain profitable since 2001, said rising fuel prices and low fares will prolong losses in the industry.
``Energy prices are driving everything right now,'' Southwest Chief Executive Gary Kelly said in a June 24 interview. ``No airline can make money with $50 crude oil prices; now we're up to $60.''
The GDP report included corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, or profits from current production, rose 6 percent, compared with an earlier estimate of 4.5 percent and a 13.5 percent gain in the fourth quarter. The fourth-quarter results were distorted by a rebound from the third quarter, when hurricanes caused a 4.8 percent decline.
Jump in Cash Flow
Current-production cash flow, or the internal funds available to companies for investment, increased 8.4 percent in the first quarter, the biggest rise since the second quarter of 1978.
Government spending rose at a 0.2 percent pace from January through March, the smallest since the third quarter of 2003, after a 0.9 percent rise in the fourth quarter.
Companies boosted inventories at a revised $66.8 billion annual rate, compared with a preliminary estimate of $68.4 billion and a fourth-quarter increase of $47.2 billion. That contributed 0.72 percentage point to growth, less than the 0.78 percentage point estimated last month.
Real final sales, or GDP minus inventories, increased at a 3 percent annual rate in the first quarter. The earlier estimate was a 2.7 percent annual rate.
Second Half
The inventory build in the first quarter suggests companies weren't adding as much to stockpiles in the current quarter, which will restrain growth. Rising fuel costs also may have limited corporate investment in plants and equipment as well, economists said.
``Looking into the second half, there's a little more uncertainty out there because of energy prices,'' said Robert Mellman, an economist at J.P. Morgan Securities in New York.
A report last week suggests companies are meeting demand by selling from existing stockpiles rather than placing new orders. Manufacturers have goods on hand representing 1.41 months supply at the current sales pace, close to a two-year high, a Commerce Department report showed last week.
The government said durable goods orders excluding transportation equipment unexpectedly fell in May, the third decline in the last four months. Economists at Lehman Brothers Inc. and Morgan Stanley lowered their second-quarter growth forecasts after the report.
To contact the reporter on this story: Joe Richter in Washington at Jrichter1@bloomberg.net
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