NEW YORK (CNN/Money) -
The U.S. economy grew at its strongest pace in more than two years in the first quarter, the government said Friday, rebounding from its first recession in a decade.
Gross domestic product (GDP), the broadest measure of economic strength, grew at a rate of 5.8 percent in the first quarter after growing 1.7 percent in the fourth quarter of 2001, the Commerce Department reported. Economists surveyed by Briefing.com expected GDP to grow 5 percent.
"The economy didn't just slide shyly out of recession, but surged out of recession," said David Kelly, economist at Putnam Investments. "The reason is all the stimulus applied to the economy after Sept. 11. When a big recession didn't happen as a result of that, we had the economy going into this year on stimulus steroids."
It was the strongest quarter of GDP growth since 8.3 percent in the fourth quarter of 1999. The government will revise the number two more times in the next two months and could revise it again at any point after that.
Despite the strength in the economy, U.S. stock prices fell Friday, driven down in part by a disappointing reading of a closely watched measure of consumer confidence. Treasury bond prices rose.
The University of Michigan's consumer sentiment index fell to 93.0 in April, weaker than the initial reading for April and the final reading of 95.7 in March, according to a Reuters report. Economists surveyed by Briefing.com expected 94.5 for April.
In the Michigan survey, which is available only to paying subscribers, consumers' view of the current state of the economy fell to 99.2 from 100.4 in March, while the index of consumer expectations fell to 89.1 from 92.7 in March, according to Reuters. Confidence figures are watched closely by policy-makers and economists since consumer spending fuels about two-thirds of GDP.
President Bush is also likely aware of consumer confidence; a sluggish recovery after the 1990-91 recession led disgruntled voters to choose Bill Clinton over Bush's father in the 1992 presidential election.
"I'm not content with this number," Bush said Friday. "We must continue working to make sure the short-term recovery is a long-term recovery."
Bush pointed out that the biggest boost to GDP came from business inventories, which shrank at a much slower rate of $36.2 billion in the first quarter, down from $119.3 billion in the fourth quarter.
The way the Commerce Department measures the change in inventories means that the $83.1 billion difference between the first and fourth quarters actually added to growth in the first quarter, since inventories shrank at a much slower rate, boosting GDP by 3.1 percentage points.
"The single most significant number is the inventory number," said Kelly of Putnam Investments. "The rebuilding of inventories hasn't even started yet. When they do, it will be a major source of additional stimulus to the economy."
Excluding the change in inventories, real sales of domestic product rose about 2.6 percent after rising 3.8 percent in the fourth quarter.
Business spending also showed signs of stabilizing, falling by only $18.2 billion after shrinking $47 billion in the fourth quarter.
But the continuing decline in business investment has caused Federal Reserve Chairman Alan Greenspan and other economists to express caution about the size and strength of the recovery this year. Some even worry that the economy could sink into a "double-dip" recession, though most doubt that such a scenario is likely.
"Clearly, Corporate America is still in hunker-down mode, reluctant to increase budgets for equipment and slow about increasing employment," said Ethan Harris, senior economist at Lehman Brothers. "That puts a weight around the neck of the recovery and keeps it at a moderate pace."
Consumer spending continued to be the stalwart of the economy, growing at a rate of 3.5 percent after rising 6.1 percent in the fourth quarter. On an annualized basis, consumer spending makes up $6.6 trillion of the nation's roughly $10 trillion economy.
Consumer spending on durable goods such as cars and computers fell 8 percent after rising 39.4 percent in the fourth quarter. Spending on non-durable goods such as food and clothing rose 8.4 percent after rising just 2.5 percent in the fourth quarter. Spending on services such as health care and tourism -- the bulk of the U.S. consumer economy -- rose 3.8 percent after rising 2 percent in the fourth quarter.
A hot housing market, driven by unseasonably warm weather, helped residential building increase 15.7 percent after shrinking 4.6 percent in the fourth quarter.
Fed likely to sit tight
A common definition of an economic recession is two straight quarters of shrinking GDP. Though that hasn't happened in the latest economic downturn, thanks in large part to resilient consumer spending, the National Bureau of Economic Research, which defines recessions using different barometers such as employment and income, said a recession began in March 2001.
To keep consumers spending despite the recession and an unemployment rate that seems likely to peak at about 6 percent this year, the Federal Reserve cut its target for short-term interest rates 11 times last year.
The central bank left rates alone at its first two policy meetings in 2002, and it eventually will need to raise them again, economists said -- especially when the economy begins to pick up steam, raising the specter of inflation.
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But economists doubt GDP will grow in the later quarters of 2002 the way it did in the first quarter. After an initial bounce to recover from the low levels of the third and fourth quarters of 2001, the economy should settle into a slower pace of growth, allowing the Fed to leave rates lower for longer, the analysts said.
And the price index for personal consumption expenditures, an inflation measure closely watched by the Fed, rose just 0.6 percent in the first quarter, compared with a 0.8 percent gain in the fourth quarter, another reason for the Fed to leave rates alone.
"This is a feel-good report. When you get a strong growth number and a low inflation number, it's hard to get a better combination than that for the economy," Lehman Brothers' Harris said.