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
"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
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
"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
"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.