Economy Has 1st Quarter Rebound

Recovering from a 1.7 percent increase in the gross domestic product (GDP) in the third quarter of 2003, the economy has registered a 4.8 increase in the GDP. The GDP measures the value of all goods and services produced within the US. This is the largest increase since the second quarter of 2004.


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High energy prices, in addition to other fallout of the Gulf Coast hurricanes and the resulting belt tightening by people and companies, have been blamed for the third quarter 2005’s relatively poor performance. Private economists expected 4.9 percent growth. The Commerce Department’s report was released late last week.

Stuart Hoffman, chief economist at PNC Financial Service Group, told the Associated Press, “The economy is off to a strong start in 2006 and has fully rebounded from the fourth quarter’s setback.” Nariman Behravesh, the chief economist at Global Insight, told the New York Times, “The good news for the U.S. is that growth has diversified. We aren’t just relying on the consumer and housing.” The New York Times predicted that the world economy would grow at 4.9 percent this year, up 0.1 percent from last year.

Other signs are positive. The Federal Reserve reports that core prices, excluding food and energy, rose by 2 percent, down from 2.4 percent in the fourth quarter 2005. This measure was taken before oil peaked at $75 a barrel in world markets, according to the Associated Press.

The Labor Department also issued another report showing signs of a strengthening job market. Wages and benefits increased by 0.6 in the first quarter 2006. That number is slowing due to less generous benefit packages, according to the Associated Press. This is the slowest pace of that measurement in seven years. On a good note, March unemployment matched the January number of 4.7 percent. The Associated Press reports this is the lowest unemployment rate in 4½ years.

Consumer spending rose 5.5 percent in the last quarter over the 0.9 percent set in the fourth quarter of 2005. Last quarter’s rate is the largest since the third quarter of 2003. The Associated Press reports business investment grew at a spectactular rate of 16.4 percent last quarter. Capital investment in buildings and plants is the reason for this best gain since the first quarter of 2000.

At the same time, the personal savings rate for Americans also dropped to negative 0.5 percent, from negative 0.2 percent, according to the Associated Press. Federal government spending was also up 3.9 percent in the last quarter, after dropping to 0.8 percent in the fourth quarter. This was over defense and non-defense sectors. State and local government spending was unchanged.

Bernanke and the Federal Reserve is proceeding with caution to avoid pushing rates up too high. Indications are that the Fed will break temporarily from boosting interest rates after their May 10 meeting. The Associated Press reports that the increase intiated at the next meeting would be the 16th increase since June 2004.

Forbes reports that Bernanke has urged “vigilance” with respect to inflation. He continues to say that interest rate decisions will rely heavily on new incoming data concerning the economy and inflation. Last week he said, “At some point in the future the committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information to the outlook.” He finished, “Sure, the central bank may relax its 2-year credit-tightening campaign a little bit, one swallow doesn’t make a summer.”

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