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News > Economy
U.S. 1Q GDP surges
April 27, 2001: 11:09 a.m. ET

Broad measure of nation's economy shows surprising strength
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NEW YORK (CNNfn) - The U.S. economy grew at a 2 percent rate in the first quarter, the government reported Friday, a sign of surprising strength indicating the world's largest economy is less likely to fall into recession.

The Commerce Department said gross domestic product (GDP) -- the broadest measure of the nation's economy -- grew at a 2 percent annual rate in the quarter, up from 1 percent in the fourth quarter. Economists surveyed by Briefing.com expected a 0.9 percent growth rate.

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Strong consumer spending drove the growth despite recent reports suggesting U.S. consumer confidence is waning.

The other positive news was that businesses trimmed inventories by $7.1 billion – the first time since 1991 that inventories did not grow – suggesting businesses are finally beginning to unload unsold goods.

The quarter marked ten straight years of unbroken economic growth -- the longest expansion on record -- and was the strongest quarter since the third quarter of 2000, when the economy grew at a 2.2 percent rate. But it was still well below the 4.8 percent growth rate in the first quarter of 2000.

And analysts were quick to note that the economy may not be as strong as the report appears to show. The strength in consumer spending may not continue, they noted, especially if the job market weakens further.

And first-quarter growth also got a boost from an unexpected fall in the  trade deficit. The report was the government's first reading on GDP and will be revised twice, on May 25 and then in June.

On Wall Street, stocks rallied after the report as investors bet that corporate profits will recover faster than expected. Bond prices fell.

Revisions coming to GDP report

"The advance GDP report is a funny animal," said Bill Cheney, chief economist with John Hancock Financial Services. "It's a combination of data that's already out there combined with official guesses. There isn't a lot of real new news."

Cheney pointed out that the report's consumer-spending data were consistent with recent reports on durable-goods consumption and home sales, but those numbers could fall if the labor market continues to weaken.

"Next week's employment report will be a much more important piece of new information," Cheney said, referring to the government's unemployment report due next Friday.

"I don't think we're going to have recession," Cheney said, "but this (data) doesn't prove we're not going to."

Inflation and the Fed

Meanwhile, the GDP price deflator, a key measure of inflation came in at 3.3 percent in the quarter, above the fourth-quarter reading of 1.9 percent and a bit stronger than economists' estimates.

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The reports come after the Federal Reserve has cut interest rates aggressively four times this year in a bid to avoid a recession, usually defined as two consecutive quarters of economic contraction.

And despite the strength in Friday's report, the Fed is probably not through cutting rates, analysts said.

"Despite the strength during the quarter, the period ended on a much weaker note, suggesting (second-quarter) growth is likely to be weaker," said Steven Wood, chief economist with Financial Oxygen. "These data are unlikely to sway the (Fed) from easing again at (its) May 15th meeting."

Ian Shepherdson, economist with High Frequency economics agreed, saying that while the Fed might not bring its target for the federal funds rate below 4 percent -- it's at 4.5 percent now -- some further cut is likely.

"(The GDP and inflation data) won't prevent modest further easing," Shepherdson said. "The Fed is still scared about (the second and third quarters)." The federal funds rate is what banks charge one another for short-term loans.

John Hancock's Bill Cheney agreed, saying the Fed was paying more attention to the labor markets than to GDP and inflation data.

Confidence slipping

With companies cutting thousands of jobs in recent months, the job market has weakened substantially and consumer confidence has been slipping, and other recent reports have confirmed that trend.

The University of Michigan's April final consumer sentiment index, which measures consumers' attitudes about the economy, fell to 88.4 in from 91.5 in March, Reuters reported Friday. The preliminary reading two weeks ago, before the Fed made its fourth rate cut, came in at 87.8. Analysts polled by Briefing.com expected a final reading of 89.0.

The university's report, released only to paying subscribers, follows Tuesday's Conference Board report showing a decline in consumer confidence.

And the Labor Department reported Thursday that new jobless claims hit the highest level in more than five years last week.

Friday's GDP report was being eyed especially closely by investors and policy makers. The slowdown in the United States has led the stock market sharply lower over the last year and forced companies to cut hundreds of thousands of workers. And President Bush has tried to use the slowdown to win support for his tax cut plan on Capitol Hill.  graphic





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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.