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Economy Roars Into 1999 on Spending Binge
By Glenn Somerville  Reuters
WASHINGTON — The strongest consumer spending in a decade helped expand the U.S. economy in the first quarter far faster than expected, the government said Friday, heightening fears of higher interest rates.

Gross domestic product, the broadest measure of goods and services output within U.S. borders, shot ahead at a 4.5 percent annual rate in January through March, down only moderately from a sizzling 6.0 percent in the fourth quarter last year, the Commerce Department said.

"The economy continues to defy the aging process," said economist Bill Cheney of John Hancock. "The only discernible weakness is the trade deficit and this has merely slowed the economy from warp speed."

The report, combined with a later one showing a pickup in Midwest manufacturing activity, hammered bond prices for fear it raised chances the Federal Reserve might boost interest rates to slow the economy and tamp potential price rises.

The bellwether 30-year U.S. Treasury bond plummeted 1-28/32 points, or $18.75 per $1,000 of face value, as its yield — which moves in the opposite direction from its price — kicked up to 5.66 percent from Thursday's close of 5.53 percent.

Share prices on the New York stock exchange initially surged, but by early afternoon joined the bond market rout. The Dow Jones Industrial Average ended down 89.34 points at 10,789.04, snapping a three-day run of record high closes.

The report said prices, measured by the GDP price index, rose 1.4 percent in the first quarter, a pickup from a 0.8 percent rise in the closing quarter last year. It was the strongest increase in nearly two years.

But Allen Sinai, an economist with Primark Decision Economics Inc. in Boston, said that price measure was misleading because it excluded falling import prices. He noted another gauge — the price index for domestic purchases — rose only 1 percent in the first quarter after a 0.9 percent fourth-quarter gain.

"This is a wondrous economy. Life really is beautiful," Sinai said. "We're seeing super-strong growth with still very low inflation. The bottom line is that the U.S. economy continues to grow like gangbusters, suggesting good job growth and rising profits."

Consumers provided the driving force behind first-quarter growth, draining savings to boost spending at a 6.7 percent annual rate in the first quarter. It was the strongest advance in personal consumption spending since 1988 and up from a 5 percent increase in the fourth quarter of last year.

President Clinton welcomed the hearty GDP growth, saying in a statement that "strong growth, high investment, low inflation, and low unemployment are a winning combination" that were enabling the economy "to grow steady and strong."

Martin Regalia, chief economist for the U.S. Chamber of Commerce, said the economy was being driven so powerfully by consumer spending while trade deteriorated that it risked becoming unbalanced if a reversal in stock market gains or other shock hit.

He said he expected GDP growth to slow to a 2-1/2-to-3 percent range after mid-year, but said he hoped that would occur through consumers trimming spending rather than as a result of Fed action.

"The fact that there has been no inflation evident at the consumer level has let the Fed stay on the sidelines thus far," Regalia said, "But the pace of growth shown in this report has to be causing consternation and heartburn at the Fed."

Sinai said the consumer spending was too strong to be sustainable and added special factors like income tax refunds — many paid earlier than usual because of increased electronic filing — and a surge in new-car buying partly accounted for the first-quarter binge.

"Will this be enough to induce the (U.S. Federal Reserve) to raise interest rates now? I don't think so," said economist Kathryn Kobe of advisory firm Joel Popkin and Co. "But the concern is this rate of growth will leave us vulnerable to more inflation later on."

A separate report from regional purchasing managers in Chicago showed a quickening pulse for the nation's manufacturing heartland. The Chicago Purchasing Management Index shot up to 63.3 in April from 57 in March. It also showed rising prices paid for the goods used in manufacturing.

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