Buying spree drives economy

Economic growth surged to 4.8 percent in the first quarter, the fastest pace in 2-1/2 years, as consumers went on a buying spree inspired by unusually mild weather that brought a brief respite from high energy prices, the Commerce Department reported yesterday.

Growth could fall to half that rate for the rest of the year as consumers, saddled with high debts, struggle with a stagnating housing market and a fresh round of record-high gas and electricity prices, analysts say.

The more than doubling of growth from 1.7 percent at the end of 2005 was a result mostly to a sixfold increase in consumer spending to a 5.5 percent pace. People lavished money on cars, home furnishings and a host of other items, but they had to dip into their savings to do so. That left them with little cushion to pay for starkly higher energy costs that emerged this spring.

Also propelling growth during the quarter was a 10.3 percent surge in defense spending and a 11.7 percent jump in nondefense spending reflecting reconstruction efforts in Gulf Coast areas devastated by Hurricanes Katrina and Rita.

The quarter also saw a revival of exports, business spending and nonresidential construction, which grew by double-digit rates after posting a lackluster performance in the fourth quarter, when the economy was battered in the aftermath of the hurricanes and weathering record-high fuel prices.

“This remarkable pace was partially catch-up,” said Peter Morici, business professor at the University of Maryland. While the surge in consumer and federal spending may be temporary, he said the pickup in business spending on equipment, software, plants and structures is a promising trend that signals the economy is shifting to greater reliance on investment for growth.

Housing construction cooled from its torrid growth rate of 10 percent a year ago to 2.6 percent last quarter, and consumers are too burdened with debt and the rising cost of essentials to keep powering the economy as they have in the past, he said.

“Business investment is increasingly the engine pulling the economy forward,” he said, or “the economy will falter.”

President Bush, who has been dogged by low ratings on his handling of the economy and other issues, hailed the impressive growth rate, and said it was “another sign that our economy is on the fast track.”

Highlighting the high spirits felt by consumers, confidence surged to a four-year high during the first quarter, egged on by receding costs for gasoline and home-heating fuels. But the spike in energy costs since then has dampened confidence. A measure published by the University of Michigan yesterday showed sentiment declined this month.

Further dampening the outlook for consumers, another report yesterday from the Labor Department showed wages and benefits rose by 0.6 percent in the first quarter, the slowest in seven years. The report showed employers are keeping a tight rein on health care and other benefits growth, and shifting more of the cost to workers.

“The Energizer bunny of economic growth — consumers — may be running out of steam as income growth remains below spending increases and as price increases for energy and loans loom large,” said Christian E. Weller, senior economist with the Center for American Progress.

Roger M. Kubarych, an economist with HVB Group, said the consumer slowdown in the face of sharply higher energy costs, interest rates and a slumping housing market will hold growth to between 2.5 percent and 2.75 percent through the rest of the year.

That will satisfy the Federal Reserve, which has been concerned about the combination of high energy costs and robust consumption sparking a bout of inflation, he said.

The Fed specifically telegraphed its intention to take a pause in its campaign of raising interest rates in testimony by Chairman Ben Bernanke on Thursday. Mr. Kubarych said the Fed will stop raising rates after its June meeting and, after seeing further slides in consumer confidence and spending, will be forced to start cutting rates by early next year.

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