Economy grows at 4.4 percent rate

WASHINGTON -- The economy grew slightly faster than previously thought in the first quarter of this year, fresh evidence of momentum heading into the summer. Higher energy prices, though, could weigh a bit on future growth, some analysts said.

The Commerce Department reported Thursday that gross domestic product from January through March increased at a 4.4 percent annual rate. That was an improvement from both the 4.2 percent pace first estimated for the quarter a month ago and the 4.1 percent growth rate registered in the final quarter of 2003.

The GDP measures the value of all goods and services produced within the United States.

While the latest reading was just shy of the 4.5 percent pace that some analysts were forecasting, it nevertheless represented a solid performance.

Although consumers and the federal government did their part to support the economy in the first quarter, economists said the better reading on GDP mostly reflected stronger investment by businesses to build up inventories.

"Businesses stepped up to the plate. ... They look to be firmly back in the game, which bodes well for future growth," said Bill Cheney, chief economist at MFC Global Investment Management.

On Wall Street, the good GDP report gave stocks a lift. The Dow Jones industrials gained 95.31 points to close at 10,205.20.

Analysts expect the economy to grow at a healthy pace in the current April-to-June quarter. But growth, they said, could be held back a bit by higher energy costs, which could crimp consumer and business spending.

"Higher energy prices aren't preventing us from having good growth, but the gain would be stronger without that impact," said Lynn Reaser, chief economist at Banc of America Capital Management.

Stuart Hoffman, chief economist at PNC Financial Services Group, is among the economists forecasting second-quarter growth to be in the range of a 3.5 percent to 4 percent pace. Reaser and other, however, estimate it will clock in from a 4 percent to 4.5 percent pace. A few believe growth could be as high as a 5 percent pace.

Under any of the forecasts, growth would be sufficient to generate jobs and keep the economy on track for a projected 4.7 percent gain in GDP for all of 2004, which would mark the strongest showing in 20 years, analysts said.

The Labor Department, meanwhile, reported that new applications for unemployment benefits dropped last week by a seasonally adjusted 3,000 to 344,000, another hopeful sign for a labor market recovery.

The economy has been among the issues that President Bush and presumptive Democratic nominee John Kerry have jousted over in the presidential campaign.

The country has lost a net 1.5 million jobs since Bush took office in January 2001, something Kerry points to as evidence that the president's economic policies aren't working. But Bush says they are, and that the best way to create jobs is to make the economy stronger.

The nation's payrolls, which had been posting lackluster gains, expanded by 288,000 in April on top of a hefty increase in March, leading economists to believe that the long awaited for recovery in the labor market was finally coming about.

With the recovery firmly rooted and inflation stirring, a growing number of economists believe the Federal Reserve may order its first rate increase in more than four years next month.

An inflation gauge tied to the GDP report showed core prices -- excluding food and energy -- rose at a 1.7 percent rate in the first quarter. Although that was lower than the 2 percent pace first estimated, it still represented a pickup from the 1.2 percent growth rate in the previous quarter.

Consumer spending, an important economic force, rose in the first quarter at a 3.9 percent rate -- slightly stronger than previously estimated and up from a 3.2 percent growth rate in the fourth quarter.

Businesses boosted spending on equipment and software in the first quarter at a 9.8 percent rate. While that was less brisk than first estimated and down from a 14.9 percent growth rate in the fourth quarter, it still represented a sizable advance.

Stronger inventory-building by businesses in the first quarter added 0.75 percentage point to the GDP, compared with a 0.27 percentage-point gain first estimated. That was a key reason why first-quarter GDP was revised upward.

After-tax corporate profits rose 1.4 percent in the first quarter, down from the previous quarter, but up a strong 36.7 percent for the year.

Military spending by the federal government grew at a 13.2 percent pace in the first quarter, down from the previous estimate but a big pickup from the previous quarter's 3 percent growth rate.