- The Washington Times - Wednesday, June 29, 2005

ASSOCIATED PRESS

The economy turned in a solid performance in the first quarter of 2005, even in the face of high energy prices, suggesting the expansion should continue.

The gross domestic product, the broadest measure of economic standing, increased at an annual rate of 3.8 percent from January through March, according to revised figures released by the Commerce Department yesterday.

That compared with a 3.5 percent growth rate estimated a month ago and matched the showing over the final three months of 2004.

GDP measures the value of all goods and services produced within the United States. In the opening quarter of 2005, it climbed to $11.1 trillion on an annualized basis, adjusted for inflation.

Brisk spending on housing projects, more investment by business in equipment and software, and a trade deficit that was less of a drag on economic growth all played a role in the higher first-quarter GDP reading.

“The economy is performing well. Sturdy growth with modest inflation,” said Mark Zandi, chief economist at Economy.com.

That is especially heartening, given the high energy prices. “It illustrates the resilience of the economy and the durability of the current economic expansion,” he said.

Oil prices reached records in March and April, and recently set a closing high of $60.54 a barrel. Prices have retreated somewhat since.

Mr. Zandi is among the economists who believe the economy is growing at a rate of 3.5 percent or better in the current April-June quarter. Others, however, predict it will end up less than 3 percent.

Federal Reserve Chairman Alan Greenspan told Congress this month that the economy in general “seems to be on a reasonably firm footing.” He did raise concerns about the housing market.

Spending on housing projects sizzled at a 11.5 percent growth rate in the first quarter, compared with 3.4 percent in the fourth quarter. That was the biggest increase since the second quarter of 2004.

Mr. Greenspan said it does not appear likely that a national housing bubble, which could pop and send prices tumbling, will develop. But he worried about “froth” in local markets.

Low mortgage rates, which have powered record-high home sales for four years in a row, are keeping housing activity buoyant.

The Bush administration pointed to the latest GDP report as evidence that economic activity is improving. “The economy is showing solid and sustained growth and job creation,” White House spokesman Scott McClellan said.

The unemployment rate dipped to a low 5.1 percent in May, but payroll growth slowed.

To keep inflation under control, the Federal Reserve has boosted short-term interest rates eight times — by one-quarter of a percentage point each time — since June 2004.

One more increase was expected at the conclusion today of the Fed’s latest meeting.

An inflation gauge tied to the GDP report and closely monitored by the Fed showed that prices — excluding food and energy — rose at a rate of 2 percent in the first quarter.

That was slightly lower than the previous estimate of a 2.2 percent increase for the quarter and compared with a 1.7 percent rate of increase in the October through December period.

Business spending on equipment and software increased at a 6.1 percent pace. That was better than the previous estimate but down from the feverish pace in the fourth quarter as companies rushed to take advantage of tax deductions to encourage sales of business equipment. These tax provisions expired at the end of last year.

Consumer spending grew at a rate of 3.6 percent in the first quarter. That was the same as a previous estimate but down from a 4.2 percent growth rate in the fourth quarter.

On the trade front, the deficit shaved a 0.6 percentage point off the GDP in the first quarter, an improvement from the 0.7 percentage-point reduction previously estimated.

“The economy seems to be on a good growth track. Inflation has calmed recently, but there remains uncertainty” about oil prices and their effect on the economy, said Lynn Reaser, chief economist at Banc of America Capital Management.


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