- The Washington Times - Saturday, April 27, 2002

Economic growth surged at a 5.8 percent rate in the first quarter, the fastest in two years, staging a stronger-than-expected rebound from recession and the September 11 attacks.
Yesterday's report from the Commerce Department showed that the economy is in the early stages of a recovery from the mildest recession in U.S. history, having for the first time posted only one quarter of declining output during the 2001 downturn.
Propelling the first stage of the recovery, businesses in recent months have slowed their deep discounting of goods, from cars to electronics, as they have cleared away much of their unwanted inventories, enabling manufacturers to start producing again.
Meanwhile, consumers, states and the federal government have helped to shore up growth by spending apace, though in recent weeks consumers, who contribute the most to the economy, have showed signs of faltering from this winter's robust spending rates.
"A vigorous recovery is in train," said Richard Berner, chief economist with Morgan Stanley. "Spreading vitality indicates a classic and powerful upswing."
But Mr. Berner noted that not all sectors of the economy are participating in the recovery, leading many on Wall Street to doubt its strength.
The Commerce report showed that consumer spending from January through March slowed nearly by half from the fall's robust pace of 6.1 percent and appears to have tailed off even further in the last month as high gasoline prices diminished confidence.
Housing posted another stellar quarter of growth, soaring at a 15.7 percent pace, while defense spending skyrocketed by 19.6 percent in the largest increase in 35 years.
Business spending on computers and other technology investments remained a weak spot in the economy, though the report showed that it is not falling as fast as during the recession.
On balance, Mr. Berner says, the brisk growth seen in the last quarter will be repeated later this year, "following a 'pause that refreshes' in the spring quarter."
The financial markets took little solace from the report, mindful that the turnaround in business spending on inventories, which accounted for half the growth seen in the report, will not be repeated in future quarters.
Worries that corporate profits are not picking up with the economy sent the Dow Jones Industrial Average back below 10,000 with a 124-point drop to 9,910.
President Bush was among those who took the good news tentatively, though he took some credit for the unusually shallow recession. Last summer's $40 billion of tax rebates boosted consumer spending just when it appeared likely to crash after the September 11 attacks.
"As encouraging as this number is, I am not content; we have more to do," Mr. Bush said, noting that the "short swing" in inventories was a "major force" behind the growth spurt.
"We must continue working to make sure the short-term recovery is a long-term recovery," he said at a morning conference with his economic team.
Federal Reserve Chairman Alan Greenspan also has stressed that the recovery needs to envelop all sectors before the recession can be declared over. He has noted that the job market, in particular, has shown few signs of growth.
The National Bureau of Economic Research, a Boston committee that is the official arbiter of U.S. recessions, has not pronounced the recession over and is not likely to do so for several more months.
Mr. Greenspan in an appearance on Capitol Hill earlier this month likened the last quarter's inventory-led growth surge to the first stage of a rocket catapulting the economy forward.
But he warned that boost must be followed by a second-stage rocket blast, consisting of increased spending by businesses and consumers, for the recovery to be sustained.
The report showed that foreign exporters benefited as much as U.S. businesses from the quarter's consumer spending binge and restocking by businesses, with a 15.5 percent jump in imports overwhelming the growth in exports.
"The first-quarter surge in GDP bypassed much of manufacturing," said Jerry Jasinowski, president of the National Association of Manufacturers, predicting that the recovery will be subpar for the nation's hard-hit industrial sector.
But Joel Naroff of Naroff Economic Advisers said the report showed that businesses have only stopped liquidating inventories at record rates and have not begun to restock their shelves in earnest, so manufacturers face more good news in coming quarters.
"The inventory rebuilding still has a very long way to go, and manufacturing will be carried along as firms rebuild," he said.
Dean Baker of the Center for Economic Policy Response said several of the sources of growth during the last quarter, such as housing and state and local government spending, will not contribute in the future as they inevitably decline from their recent frenetic levels.
State and local governments are facing budget shortfalls that jeopardize their spending plans, and looming deficits will make it difficult for the federal government to keep up its double-digit rate of spending growth, he said.
"The nature of the growth raises serious questions about the sustainability of the expansion," Mr. Baker said. "With the effect of higher oil prices yet to be felt, the economy will experience much slower growth over the rest of the year."

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