5.6 percent US growth may mean stronger momentum

Iran Materials 30 June 2006 11:27 (UTC +04:00)

(AFP) - The US economy was stronger than believed in the first quarter with a 5.6 percent growth pace, data showed, suggesting an expected cooling trend may be less severe than anticipated.

The Commerce Department's final estimate for first-quarter gross domestic product (GDP), revised up from 5.3 percent in last month's report, was in line with market expectations, reports Trend.

Many experts see the surge in economic activity as a temporary rebound from last year's hurricane-induced slowdown. But the higher pace could mean the slowdown is not as bad as feared, analysts said.

"This report suggests there's even more underlying momentum in the economy than previously thought, particularly in business investment," said Sal Guatieri, senior economist at BMO Financial Group.

"Consumer spending remains strong, even though it was revised down."

The higher growth rate mainly stemmed from a downward revision to imports, reflecting the annual revisions to trade data. The change in net exports now cuts less than half its prior amount from growth.

The latest revision included an inflation estimate revised downward to 3.1 percent from 3.3 percent. The core inflation level, excluding food and energy, held at 2.0 percent.

The report is the third and final estimate of GDP growth for the world's largest economy. The first estimate for the second quarter, expected to show significant cooling, is set for release July 28.

Nariman Behravesh, chief economist at the research firm Global Insight, said the report is "old news."

"The economy has already decelerated," Behravesh said, predicting the second-quarter growth rate would be only about 2.7 percent as the housing market and consumer spending weaken.

"The slowdown is already evident in the monthly data released over the past two months," he said.

The strong pace of growth represents a sharp rebound from the 1.7 percent growth rate in the fourth quarter -- the result of a slowdown induced by the devastation of Hurricane Katrina.

Final sales -- a figure that includes economic activity minus inventory -- were up 5.9 percent, according to the report, revised upward from the last estimate of 5.5 percent.

Consumer spending remained the driving force of the economy, showing 5.1 percent growth as measured by the report's personal consumption expenditures. That represented a slight downward revision from 5.2 percent.

Another big factor was nonresidential investment, up at a 14.2 percent pace, above the last estimate of 13.1 percent, led by business investment in computer equipment.

The report showed the output of US goods and services at an annual pace of 13.042 trillion dollars, an increase of 8.9 percent in current dollars.

Economists said the report raises questions for the Federal Reserve, which raised its key rate for the 17th consecutive time by a quarter point on Thursday to 5.25 percent.

Scott Anderson, senior economist at Wells Fargo, said the economic cooling is already apparent following the report, which covered the January-March quarter. This slowdown will ease inflation pressures, he said.

"We think the housing markets and consumer cooling down will put a lid on inflation, and you also could see commodity and gasoline prices come down," Anderson said.

Patrick Fearon, senior economist at AG Edwards, said he is concerned about the Fed going too far because "every time they raise rates they increase the risk of an economic slowdown."

Fearon said he would urge the Fed to halt the cycle of rate hikes after the current meeting.

"We already think GDP growth in this quarter will slow to 2.2 percent, which is a big drop from the first quarter, and through 2007 we don't see the growth rate rising above 3.0 percent, and that's assuming that the Fed stands pat after today's increase," he said.