GDP shows strongest growth rate since 1999

WASHINGTON -- Breaking out of the doldrums, the economy grew in the first quarter at a 5.8 percent annual rate, its strongest performance in more than two years and proof positive that last year's recession is history.

The recovery comes after the gross domestic product -- the broadest measure of the economy's health -- turned in six below-par quarters as companies throttled back production, let go of workers and saw profits plunge.

"The nail has been put in the recession coffin," said Mark Zandi, chief economist at Economy.com. "The economic sun is shining again."

The latest GDP report, released by the Commerce Department Friday, not only bolstered the view that the economy is healing from the recession that began in March 2001, but that the downturn will likely go down as the mildest in U.S. history.

Recovery views mixed

Even so, economists have mixed thoughts on how the economic recovery will ultimately shape up, with predictions ranging from sluggish to solid, but probably not sizzling.

President Bush, who wants credit for steering the economy out of recession and onto firm footing, said the economic turnaround was helped by his $1.35 trillion tax-cut package enacted last year. He called on Congress to make that tax relief permanent.

"We must continue working to make sure this short-term recovery is a long-term recovery," Bush said.

Even with the economy improving, analysts predict the nation's unemployment rate -- now at 5.7 percent -- will rise to around 6 percent this summer because companies will be slow to hire back workers until the recovery is assured.

On Wall Street, investors despairing over earnings ignored the GDP report. The Dow Jones industrial average fell below 10,000 for the first time in more than two months. The index closed down 124.34 points at 9,910.72.

A big factor in the economy's stellar first-quarter expansion was a slowdown in inventory liquidation by businesses. That added a hefty 3.1 percentage points to the GDP, its largest contribution since the fourth quarter of 1987.

During the slump, businesses sharply cut production and discounted merchandise to get rid of stockpiles of unsold goods. That was a key source of weakness for the economy and a huge drag on the GDP in the fourth quarter.

Nonetheless, economists said it was crucial for businesses to unload excess supplies in order to set the stage for ramped-up production by manufacturers down the road, which would add to economic growth.

Growth pace slows

Because the burst provided by the inventory situation in the first quarter is fleeting, economists estimate the GDP, which measures the total output of goods and services produced within the United States, has slowed in the current quarter to a growth rate of around 3 percent to 3.5 percent. That would still be considered a respectably brisk pace.

Most economists don't foresee a "double-dip recession," in which the economy slips into reverse. But they question how much of an appetite consumers -- who were buying through the recession -- will have to spend coming out of it. And they wonder when business investment will turn around, a necessity for a solid economic rebound.

Given this, analysts believe the Fed, which cut short-term interest rates 11 times last year to rescue the economy, will leave rates -- now at 40-year lows-- unchanged at its May 7 meeting.

Consumer spending, which accounts for two-thirds of all economic activity in the United States, rose at a healthy rate of 3.5 percent, lifting first-quarter GDP. But that was a slowdown from the previous quarter's red-hot 6.1 percent growth rate.

Another booster to first-quarter GDP: a 15.7 percent rate of increase in spending on residential projects, the biggest gain since the second quarter of 1996. Low interest rates and mild weather in the first quarter powered home sales.

Government spending on national defense rose at a 19.6 percent rate, the largest increase in 35 years, also contributing to the first quarter's strength.

Businesses continued to cut investment in new plants and equipment -- a leading source of weakness for the economy -- but at a 5.7 percent rate, not nearly as deep as the 13.8 percent rate of decline in the fourth quarter.

The trade deficit was another weak spot. The deficit shaved 1.22 percentage points off first-quarter GDP as the improving U.S. economy lifted Americans' demand for foreign-made goods.

The first-quarter GDP performance was especially remarkable given that economy shrank at a 1.3 percent rate in the third quarter of 2001. GDP grew at a 1.7 percent in the fourth quarter.

Based on the current GDP data, the drop in economic output during the recession was a small 0.3 percent, which would be the mildest on record. That record has been held by the 1969-1970 recession, when GDP fell 0.6 percent.

"The recession was mild," said Bill Cheney, chief economist at John Hancock. "The recovery will be too. No big bust, no big boom."