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U.S. Economic Growth Surges in 1st Quarter

The 4.8% rate is the best since 2003, but analysts expect a slower pace the rest of the year and a report suggests workers' pay is trailing inflation.

April 29, 2006|Joel Havemann | Times Staff Writer

WASHINGTON — The U.S. economy grew briskly in the first three months of this year, the government reported Friday, but new evidence suggested that ordinary workers were still not keeping pace with inflation.

Shaking off the effects of Hurricane Katrina, the economy grew at an annual inflation-adjusted rate of 4.8% in the first quarter, the Commerce Department said. The burst offset a meager 1.7% growth rate in the last three months of last year after the hurricane struck the Gulf Coast.

Only once in George W. Bush's presidency -- when the economy grew at a 7.2% rate in the third quarter of 2003 -- has economic growth been more robust than in the first quarter.

"The economy was firing on all cylinders," said Mark Zandi, chief economist for Moody's Economy.com. Consumer spending and business investment were strong, and U.S. exports rose smartly, Zandi said.

President Bush called the report "impressive" and "another sign that our economy is on the fast track."

But most analysts expect the economy to slow down the rest of this year as the red-hot housing market cools and high energy prices take their toll.

In a separate report, the Labor Department said total compensation costs -- salaries and benefits for all civilian workers -- rose 0.6% in the first quarter. That was the slowest pace in seven years. Adjusted for inflation, employment costs fell 0.8% for the first quarter and 0.5% for the year ended in March.

Employment costs for the year ended last month rose 2.8%, the lowest annual increase since the department began compiling this series of data in 2001.

That's further evidence that the tight labor market -- unemployment was a low 4.7% last month -- has not triggered wage increases.

The specter of worker pay lagging behind inflation has been a recurrent theme of the current recovery. And it is a reason polls show skepticism among many Americans about the economy's strength.

By contrast, the inflation news in the Commerce Department's economic growth report was ambiguous.

The inflation index that measures what consumers pay for what they consume rose 2% -- low by historical standards but at the top of the informal target range set by the Federal Reserve. That figure does not capture most of the recent run-up in oil prices, which occurred in April.

Consumers -- as usual -- were largely responsible for the strong first-quarter growth. Expenditures for personal consumption surged 5.5%, the Commerce Department said, and accounted for 3.8 percentage points of the 4.8% increase in economic output.

Private domestic investment grew even faster, by 6.5%. But residential investment rose by only 2.6%, compared with the double-digit increases it was registering a year ago -- a sign of cooling in the housing market.

And even though exports rose a solid 12%, international trade detracted from U.S. economic growth because imports jumped 13%.

Analysts generally agree that the economy can't sustain for long the first quarter's torrid pace.

Brian Bethune, U.S. economist for Global Insight, said the average growth rate of the last six months -- 3.25% -- represented the economy's current potential of "solid growth but not over the top."

"The head winds to growth in the second quarter are picking up in ferocity," Bethune said.

Nonetheless, he said, the Federal Reserve's policymaking committee would "take out a little insurance" against resurgent inflation by boosting its benchmark short-term interest rate to 5% in May and 5.25% in June before taking an "extended pause."

Steven Wieting, Citigroup's U.S. economist, said the economy would plateau at a growth rate of about 3% for the rest of the year. Ian Shepherdson, chief U.S. economist for High Frequency Economics, said he expected growth of 3% or less.

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