The buying binge by U.S. consumers propelled the economy ahead at a hefty 4.5 percent rate in the first quarter, much faster than economists had predicted only a few months ago, the Commerce Department reported Friday.
Shrugging off reports that they are experiencing sluggish wage growth while drawing down their household savings–government data that many economists now consider seriously flawed–U.S. consumers stepped up their purchases of every item on the typical household purchasing list: housing, durable goods, consumables and services.
Only the drag from a worsening trade deficit– which was itself caused by consumers’ unslaked thirst for foreign goods–kept the economy from growing at the fourth quarter’s robust 6 percent annual rate.
Although the latest report on the booming economy reawakened inflation fears in some quarters and sent the bond market plunging, the surprising performance had analysts reaching for superlatives.
“It’s the best economy we’ve ever had–in all of U.S. history,” said Bruce Steinberg, chief economist for Merrill Lynch. “Here we are in the ninth year of what’s already the longest peacetime expansion in U.S. history, and none of the typical imbalances that lead to recession are present.”
Those factors include inflation, excessive indebtedness and a dangerous buildup of inventories, none of which are present in this economy, he said.
Take inflation, for instance, which is the one factor that would cause Federal Reserve Chairman Alan Greenspan to raise interest rates and put an end to this party.
In the first quarter, the inflation adjustment factor in the government report jumped up slightly from last quarter’s stunningly low 0.8 percent rate. But the 1.4 percent increase was largely due to a federal pay increase and the bounceback in some commodity prices, such as oil, which had been at an unrealistically low level.
“The Fed is not going to raise rates until it sees some inflation and so far there is no sign of a pickup,” said Paul Kasriel, an economist at Northern Trust Corp.
But bond market participants, whose investment moves in the opposite direction of interest rates, sent bond prices reeling Friday on the presumption that the superheated economy will eventually breed inflation and prompt the Fed to raise rates.
The bellwether 30-year U.S. Treasury bond’s price fell, lifting its yield to 5.66 percent after a close of 5.52 percent late Thursday.
Stock traders also reacted negatively. The Dow Jones industrial average, after soaring early in the day into record territory, closed off 89.34 points at 10,789.04.
As far as consumer spending was concerned, there were no signs of weakness in the first quarter. Expenditures on housing rose at a stunning 15.6 percent annual rate; durable goods surged at an 11.5 percent clip; non-durable goods rose 9.2 percent, and services were up 4.5 percent.
The overall 6.7 percent increase in consumer spending was the strongest quarterly advance since 1988, and was considerably higher than the 5.0 percent increase registered in the final 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” enabling the economy “to grow steady and strong.”
The good news for Midwestern manufacturers was in durable goods purchases. The Purchasing Management Association of Chicago’s index, compiled by regional purchasing managers, shot up to 63.3 in April from 57 in March, and showed that the past two quarters of solid growth in durables purchases is finally showing up on the factory floor after that sector took a hit because of lost exports.
Although falling exports remain a major drag on the manufacturing sector, the latest signs from Asia indicate even that negative may be abating. Several of the most troubled economies in Asia–South Korea and Thailand, for instance–have resumed growing in recent months, and the downturn in Latin America from Brazil’s recession has so far been less than advertised.
“There’s a global warming that should help our manufacturing sector going forward,” said Sung Won Sohn, chief economist at Wells Fargo & Co. “The Asia and Latin American rebound should help our exports.”
Exports dropped at a 7.7 percent annual rate in the first quarter, led by a 12 percent annualized drop in the export of manufactured goods. That swamped the 3.4 percent increase in service exports, which includes items like insurance, financial services and airline tickets sold abroad.
Imports, meanwhile, surged at an 11.7 percent rate, which was about the same as during the fourth quarter. The U.S. annual trade deficit could hit $300 billion this year, an all-time record.
Meanwhile, the Commerce report indicated personal savings shrank at a 0.5 percent rate, or by $30.9 billion, in the first quarter after being flat in the fourth quarter. It was the weakest performance for the quarterly savings rate since the government began compiling the figure in 1946.
Economists are increasingly divided on the meaning of this statistic. “I don’t think it is healthy to maintain this level of consumer spending,” Sohn said. “The stock market is doing the saving for people.”
But Merrill Lynch’s Steinberg sees nothing wrong in that. “Capital gains from the stock market isn’t included in the personal income statistics, nor are bonuses or stock options. If those are included, the savings rate was 7 percent annually over the last four years,” he said.
Indeed, the one factor that could derail the economy before it becomes the longest expansion in U.S. history–that milestone would take place in January–would be a sharp stock market sell-off. “No economy has ever been as equity-linked as this one,” Steinberg said.
