The US economy grew at a blistering annualised rate of 4.8 per cent in the first quarter, its fastest in more than two years, as it bounced back from its post-hurricane weakness with a renewed surge of consumer spending.
The US Bureau of Economic Analysis said personal spending increased 5.5 per cent in the first quarter, compared with an increase of 0.9 per cent in the fourth. Spending on durables powered ahead at an annualised rate of 20.6 per cent, after a sharp slowdown at the end of last year.
Business investment in equipment and software was also up smartly, and the economy benefited from a spurt in federal government defence spending. Companies took the opportunity to reduce inventories that had piled up in the weak fourth quarter. Final demand for goods and services sold grew even more rapidly than gross domestic product, up 5.4 per cent. The personal savings rate fell from minus 0.2 per cent of disposable income to minus 0.5 per cent.
President George W. Bush attempted to draw political capital from the resurgent economy, telling reporters the first-quarter figures were “another sign that our economy is on the fast track”.
Mr Bush has received low marks in recent polls for his handling of the economy but Republicans are hoping strong growth and job creation figures will change that perception before November’s congressional elections.
The outcome was in line with market expectations, with economists forecasting a strong rebound after growth of just 1.7 per cent in the fourth quarter of 2005. It follows a week of strong earnings reports, which pushed the Dow Jones Industrial Average to a six-year high of 11,382 on Thursday.
The broader S&P 500 index was close to five-year highs at 1312 in morning trading on Friday, while the yield on the 10-year US Treasury bond, which broke above 5.1 per cent this week for the first time in four years on signs of economic strength, was at 5.09 per cent.
The strong numbers will fuel debate on whether the economy is on track to slow towards more sustainable levels later this year or has so much momentum it is in danger of overheating.
“There are certainly going to be some headwinds from the higher gasoline prices over the coming months,” said Paul Ashworth, an analyst at Capital Economics, the consultancy. “But the economy still has quite a lot of momentum and we should remain fairly close to trend growth.”
The core PCE deflator rose at an annualised 2 per cent in the first quarter, suggesting underlying inflationary pressure remains very stable, though still close to the upper end of the comfort range outlined by some members of the Federal Reserve’s open market committee.
The Fed is not likely to react too strongly to the data. Some spending was probably shifted from the fourth quarter to the first, while good weather probably brought forward some spending.
